Forgetting (again) the decisive role of EXPECTATIONS

Martin Wolff is in the right frame of mind:

It is the policy that dare not speak its name: the printing press. The time has come to employ this nuclear option on a grand scale. The alternative is likely to be a lost decade. The waste is more than unnecessary; it is cruel. Sadists seem to revel in that cruelty. Sane people should reject it. It is wrong, intellectually and morally.

But makes the fatal error of falling back on the “size” of needed stimulus instead of on the TARGET to be pursued, which would shape expectations:

It is vital, then, to sustain demand. With fiscal policy set on kamikaze tightening and conventional monetary policy almost exhausted, that leaves “quantitative easing”. Mr Posen recommends a great deal more of it, starting with “a minimum of £50bn in gilt purchases in secondary markets” though he now boldly recommends something closer to £75bn or £100bn, in light of the dire external environment.

For example: Specify a TARGET and “shoot for it”!

7 thoughts on “Forgetting (again) the decisive role of EXPECTATIONS

  1. “shoot for it”? That does not sound very… British. In modern British monetary policy, we prefer a more subtle expectation channel. The BOE have been dripfeeding us articles and speeches from Monetary Policy Committee members making the case for QE for most of September. You could argue it worked, too:

    Particularly compared to the collapsing US 5y breakevens…

    • Britmouse
      “Dripfeeding” is a way, certainly. Maybe not forceful enough. And if a target is not stated (just “amounts”) it can backtrack pretty easily. I agree, “shoot for it” is more adept to the “American way”!

  2. Hi Marcus,
    Let’s assume that the Fed announces it will target a specific NGDP and that they will purchase enough assets until they reach this target. The fed starts the program of buying assets, yet the increase in cash is offset by an equal shift in velocity and the cash continues to sit in reserve (due to a led of fed credibility or whatever reason). So the next step for the fed is to buy larger amounts of assets but is there a certain point where the gov’t could begin to issue new bonds to invest in fiscal stimulus while at the same time that the fed purchases other assets in order to push NGDP back on trend?


  3. At least someone is saying out loud what I have been bellowing for years: Print more money. Print money. Print money, print money until the plates melt.

    If I could, I would toss a few hundred billion Ben Franklins out onto the street. Oh, I know, moral hazard and all that. Give unto me a robust recovery, and I will eat moral hazard and inflation for breakfast.

  4. Pingback: TheMoneyIllusion » It’s the target, stupid

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