“Whatever it takes to get deflation” (Stealing two graphs from Marcus Nunes)

Marcus Nunes has two extremely illustratative graphs in his latest blog post. Just take a look here:

 

 I don’t think any other comments are needed…

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Book of the day – Nunes and Cole

Not much time for blogging, but this is ‘book of the day’ – it just arrived in the mail. Maybe you should buy it as well – do it here (ebook) or here (paperback).

nunescole

See also here.

New book on Market Monetarism from Nunes and Cole

I don’t have much time for blogging, but buy this new book written by my good friends Marcus Nunes and Benjamin Cole:  Market Monetarism Roadmap to Economic Prosperity

here is the book description:

Market Monetarism – Roadmap to Economic Prosperity takes readers though a succinct, entertaining and accessible history of United States monetary policy in the postwar era, and how the Federal Reserve Board propelled the nation into The Great Inflation (think 1960s-1970s), a brief Volcker Transition (early 1980s), then a pleasant sojourn to The Great Moderation (mid-1980s-2007), before a trip to The Great Recession (2008–). Abundant charts clearly and amply illustrate monetary and economic events. The concepts of Market Monetarism and nominal GDP targeting are also introduced, which provide a policy framework for the Federal Reserve Board and other central bankers to avoid future inflationary and recessionary traps.

And here is what I have to say about it on the cover of the book:

“Nunes and Cole have written the first fully Market Monetarist account of post-second world war US monetary history. They forcefully demonstrate the monetary nature of both the Great Inflation and the Great Recession. They show that the Federal Reserve is to blame both for the high inflation of the 1970s and the horrors of the Great Recession. I gladly recommend this book to the layperson and the economist alike who would like to understand why and how failed monetary policy caused the present crisis.”

 

Update: Scott Sumner also comments on the book.

Jeff Frankel repeats his call for NGDP targeting

Here is Jeff Frankel on Project Syndicate:

“Monetary policymakers in some countries should contemplate a shift toward targeting nominal GDP – a switch that could be phased in gradually in such a way as to preserve credibility with respect to inflation. Indeed, for many advanced economies, in particular, a nominal-GDP target is clearly superior to the status quo….

…A nominal-GDP target’s advantage relative to an inflation target is its robustness, particularly with respect to supply shocks and terms-of-trade shocks. For example, with a nominal-GDP target, the ECB could have avoided its mistake in July 2008, when, just as the economy was going into recession, it responded to a spike in world oil prices by raising interest rates to fight consumer price inflation. Likewise, the Fed might have avoided the mistake of excessively easy monetary policy in 2004-06 (when annual nominal GDP growth exceeded 6%)…

…The idea of targeting nominal GDP has been around since the 1980’s, when many macroeconomists viewed it as a logical solution to the difficulties of targeting the money supply, particularly with respect to velocity shocks. Such proposals have been revived now partly in order to deliver monetary stimulus and higher growth in the US, Japan, and Europe while still maintaining a credible nominal anchor. In an economy teetering between recovery and recession, a 4-5% target for nominal GDP growth in the coming year would have an effect equivalent to that of a 4% inflation target.

Monetary policymakers in some advanced countries face the problem of the “zero lower bound”: short-term nominal interest rates cannot be pushed any lower than they already are. Some economists have recently proposed responding to high unemployment by increasing the target for annual inflation from the traditional 2% to, say, 4%, thereby reducing the real (inflation-adjusted) interest rate. They like to remind Fed Chairman Ben Bernanke that he made similar recommendationsto the Japanese authorities ten years ago…

…Shortly thereafter, projections for nominal GDP growth in the coming three years should be added – higher than 4% for the US, UK, and eurozone (perhaps 5% in the first year, rising to 5.5% after that, but with the long-run projection unchanged at 4-4.5%). This would trigger much public speculation about how the 5.5% breaks down between real growth and inflation. The truth is that central banks have no control over that – monetary policy determines the total of real growth and inflation, but not the relative magnitude of each.

A nominal-GDP target would ensure either that real growth accelerates or, if not, that the real interest rate declines automatically, pushing up demand. The targets for nominal GDP growth could be chosen in a way that puts the level of nominal GDP on an accelerated path back to its pre-recession trend. In the long run, when nominal GDP growth is back on its annual path of 4-4.5%, real growth will return to its potential, say 2-2.5%, with inflation back at 1.5-2%.

Phasing in nominal-GDP targeting delivers the advantage of some stimulus now, when it is needed, while respecting central bankers’ reluctance to abandon their cherished inflation target.

Marcus Nunes also comments on Jeff.

Imagine if Charles Evans was on the ECB’s Executive Board

Yesterday, I did a (very short) post about Irish deflation and there is no doubt that the euro crisis continues. Depressingly there is no really appetite among ECB policy maker to fundamentally have a change of monetary policy to change the status quo and while there is a (misguided) debate going on about fiscal austerity in Europe there is still no real debate about the monetary policy set-up in Europe. On the other hand in the US we are having a real debate among academics, commentators and central bankers about US monetary policy. In the US fed economists like Robert Hetzel are allowed to publish book about how monetary policy mistakes cause the Great Recession. In Europe there is no debate. That is very unfortunate.

The contrast between Europe and the US would be very clear by listen to what Chicago Fed’s Charles Evans have to say about US monetary policy. Take a look at this debate in which Evans endorse NGDP level targeting! Could you imagine that a member of the ECB Executive Board did that? Wouldn’t that just be a nice change from the business-as-usual climate we have now?

See also this excellent article from pro-market monetarist commentator Matt O’Brien at The Atlantic on Charles Evans’ endorsement of NGDP level targeting.

Our friend Marcus Nunes also has an update on Charles Evans pro-NGDP targeting position. See Scott Sumner on the same topic here.

PS Charlie if you are interest the British government is looking for a new Bank of England governor…

David Beckworth on Bernanke’s inconsistencies

David Beckworth has an extremely insightful blog post on the inconsistencies of Ben Bernanke’s views as an academic and as a central bank chief.

Anybody who have read the academic Ben Bernanke’s analysis of the Great Depression and particularly of Japan’s 1990s deflation will be stroke by how different his views are from Fed chairman Bernanke’s views. Bernanke obviously claims that he is not inconsistent. Furthermore, Bernanke claims that the situation in the US is very different from Japan in the 1990s. David on the other very clearly shows that Bernanke is indeed inconsistent and that the academic Bernanke would have realized that there are significant similarities between Japan in the 1990s and the US today.

David’s graph on Japanese and US demand deficiency shows it all. Have a look here.

I really have not much to add other than I think David is 100% right. The Federal Reserve is risking repeating the failures of the Bank of Japan if the Fed chairman keeps forgetting about the excellent research on Japan by the academic Ben Bernanke.

Scott Sumner has two post on Bernanke – here and here. Marcus Nunes also has a comment on Bernanke’s inconsistencies.

PS This discussion reminded me of one of my own earlier posts: Needed: Rooseveltian Resolve. The story is the same – I miss Ben Bernanke the academic.

George Selgin outlines strategy for the privatisation of the money supply

I have earlier argued that NGDP targeting is a effectively emulating the outcome under a perfect Free Banking system and as such NGDP level targeting can be seen as a privatisation strategy. George Selgin has just endorsed this kind of idea in a presentation at the Italian Free Market think tank the Bruno Leoni Institute. The presentation is available on twitcam.

You can see the presentation here. You need a bit of patience if you are not Italian speaking, but George eventually switch to English. The presentation lasts around 45 minutes.

I will not go through all of George’s arguments – instead I recommend everybody to take a look at George’s presentation on your own. However, let me give a brief overview.

Basically George see a three step procedure for the privatisation of the money supply and how to go from the present fiat based monetary monopoly to what he calls a Free Banking system based on a Quasi Commodity Standard. Often Free Banking proponents tend to start out with some kind of gold standard – or at least assume that some sort of commodity standard is necessary for a Free Banking system to work. George does not endorse a gold standard. Rather he favours a privatisation strategy based on a NGDP targeting rule.

Essentially George spells out a three step procedure toward the privatisation of the money supply.

The first step (and this is especially directed towards the US Federal Reserve) is to move towards a much more flexible system provision of liquidity to the market than under the present US system where the Federal Reserve historically has relied on so-called primary dealers in the money market. George wants to abolish this system and instead wants the Fed to control the money base directly through open market operations. I fully endorse such a system. There is no reason why the monetary system and the banking system will have to be so closely intertwined as is the case in many countries. A system based on open market operations would also do away with the ad hoc nature of the many lending facilities that have been implemented in both the euro zone and the US since 2008.  George is essentially is saying what Market Monetarists have argued as well and that is that central banks should be less focused on “saving” the financial sector and more focused on ensuring the flow of liquidity (and yes, that is two very different things). George discusses these ideas in depth in his recent paper “L STREET:Bagehotian Prescriptions for a 21st-century Money Market”. I hope to return to a discussion of this paper at a later point.

The second step – and that should interest Market Monetarists – is that George comes out and strongly endorses NGDP targeting – or as George puts it a “stable rule for growth of aggregate (nominal) spending” and argues that central banks should do away with discretion in the conduct of monetary policy. George directly refers to Scott Sumner as he is making this argument. George’s preferred rate of growth of nominal spending is 2.5-3% – contrary to Scott’s suggestion of a 5% growth. That said, I am pretty sure that George would be happy if the Federal Reserve implemented Scott’s suggested rule. George is not religious about this. I on my part I am probably closer to George’s view than to Scott’s view, but again this is not overly important and practically a 5% growth rate would more or less be a return to the Great Moderation standard at least for the US. It should of course be noted that there is nothing new in the fact that George supports NGDP targeting – just read “Less than zero” folks! However, George in his presentation puts this nicely into the perspective of strategy to privatise the supply of money.

In arguing in favour of nominal spending targeting George makes it clear that it is not about indirectly ensuring some stable inflation rate in the long run, but rather “stability of (nominal) spending is the ultimate goal”. I am sure Scott will be applauding loudly. Furthermore – and this is in my view extremely important – a rule to ensure stability of nominal spending will ensure that there is no excuse for ad hoc and discretionary policy. With liquidity provision based on a flexible framework of open market operations and NGDP targeting the money supply will effectively be endogenous and any increase in money demand will always be met by an increase in the the money supply. So even if a financial crisis leads to a sharp increase in money demand there will be no argument at all for discretionary changes in the monetary policy framework. (Recently I have been talking about whether pro-NGDP targeting keynesians like Paul Krugman are saying the same as Market Monetarists. My argument is that they are not – Paul Krugman probably would hate the suggestion that monetary discretion should be given up).

Market Monetarists should have no problem endorsing these two first steps. However, the third step and that is the total privation of the supply on money will be more hard to endorse for some Market Monetarists. Hence, Scott Sumner has not endorsed Free Banking – neither has Nick Rowe nor has Marcus Nunes. However, I guess Bill Woolsey, David Beckworth and myself probably have some (a lot?) sympathy for the idea of eventually getting rid of central banks altogether.

This, however, is a rather academic discussion and at least to me the discussion of NGDP targeting and changing of central bank operating procedures for now is much more important. That said, George discusses a privatisation of the money supply based on what he calls a Quasi Commodity Standard (QCS). QCS is inspired by the technological development of the so-called Bitcoins. I will not discuss this issue in depth here, but I hope to return to the discussion once George has spelled out the idea in a paper.

Once again – have a look at George’s presentation.

HT Blake Johnson

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