A defining quote

This ends James Surowiecki´s latest at The New Yorker – No end in sight. Don´t miss it:

Five years ago, an unemployment rate of seven and a half per cent would have seemed outrageous, but it’s possible that five years from now it will seem not so bad. A long-term crisis, after a certain point, no longer seems like a crisis. It seems like the way things are. ♦

Krugman poses the wrong question

In QE or Not QE, That Is The Question, Krugman says:

OK, some readers have asked me to react to this critique by Mike Kimel. Brief response: Kimel apparently misses the distinction between ordinary monetary policy and quantitative easing, and also misunderstands what the Fed is buying.

The problem is that as soon as you say there are “two kinds of monetary policy” you botch it. And Krugman does so by assuming that the ZLB is binding. In that case you pull out MP2:

Ordinary monetary policy involves cutting short-term rates to fight a slump; it’s not what we’re talking about here, since it’s hard up against the zero lower bound.

QE is an attempt to get traction despite those zero short-term rates by buying long-term debt, hopefully narrowing the spread and thereby boosting the economy. I don’t think it’s had a large effect, but that’s the goal.

As the figure below shows, it´s not that it did not have a “large effect”. Instead of “hopefully narrowing the spread”, it systematically widened it!

QE, despite mumblings to the contrary, was never about reducing long term rates (or the spread). It was about lifting inflation and inflation expectations. Remember that BB is terrified of deflation. So as soon as the danger passed, QE was “discontinued”.

Now, imagine if QE was a strategy associated with a well specified target (say, a nominal GDP level target). If it worked to avoid a “deflationary spiral” it certainly will work to produce a “spending spiral” toward the target. And that´s what you want to happen if the objective is to bring unemployment down and employment and real output up.

For much more detail check out this Scott Sumner post:

I strongly believe that interest rates are the wrong policy instrument.  But most people disagree with me.  Even when the Fed does QE, they justify it as an action that will reduce long term rates.  They seem completely unable to communicate to the public in any non-Keynesian language.

It´s not so much the level of public debt, but the weight of government that tends to slow growth

The abstract to recent research by Ugo Panizza and Andrea F Presbitero on the effects of public debt on growth reads:

Countries with high public debt tend to grow slowly – a correlation often used to justify austerity. This column presents new evidence challenging this view. The authors point out that correlation does not imply causality – it may be that slow growth causes high debt. They argue that policymakers should be wary – the case for cutting debt to boost growth still needs to be made.

The conclusion:

Our reading of the empirical evidence on the debt-growth link in advanced economies is:

  • Many papers that show that public debt is negatively correlated with economic growth.
  • No paper that makes a convincing case for a causal link going from debt to growth.
  • Our new paper suggests that such a causal link does not exist (more precisely, our paper does not reject the null hypothesis that there is no impact of debt on growth).

We realize that our results are controversial. While we are convinced of the soundness of our findings, we know that skeptical readers will find ways to challenge our identification strategy. However, the first two points are uncontroversial. The case that public debt has causal effect on economic growth still needs to be made.

But maybe it´s not the level of public debt that stifles growth, but the size of government as measured by the ratio of government expenditures to GDP (G/Y). Australia, for example, has a relatively low G/Y ratio, but its public debt ratio is not that much different from the average debt ratio in advanced economies.

A few months ago I did a post on that topic. A summary:

In the top part of the table below are the 6 OECD countries which registered the lowest increases in the G/Y ratio between 1960 and 2007 (brake point defined to avoid the “distortions” that followed the onset of the crisis). In the lower part the countries that registered the largest increases.

The last three columns show the average real economic growth rates in the first 13 years of the sample, in the last 13 years and the change in growth between the two periods.

Notice that the weight of government (G/Y) increased in all OECD countries between 1960 and 2007. However, the differences are substantial. In those countries where G/Y rose less the average increase was 10.6 percentage points while in those countries that the government share increased most, the average rise was 25 points.

As seen in the last three columns, growth was more strongly reduced among the countries that experienced the largest increase in G/Y: -2.8% which compares to -0.5% for the countries with the lowest increase in G/Y.

Note that three of today´s “crisis countries” – Greece, Portugal and Spain – are also countries that saw the largest increase in the share of government and the largest loss of dynamism, with economic growth rates falling significantly.

“Much ado about ‘nothing’”

That´s just a parody on Krugman´s “Much ado about zero”:

Ryan Avent and Matt Yglesias have been having a debate about whether the zero lower bound really matters for monetary policy, which is related to — but not the same as — the debate about whether the Fed is falling way short on the job. So let me throw in my two basis points here.

The shared starting point here is that we are in a situation in which the Fed would clearly cut rates if it could; based on historical relationships between unemployment, inflation, and policy rates, the Fed funds rate “should” be something like -4 percent. But the Fed can’t do that. What it could do, however, is try to reduce real interest rates by raising expected inflation.

Changing inflation expectations may be similar in its implications to just cutting rates, but it’s very different in terms of implementation. The Fed can cut rates simply by telling the open-market desk to make it so; it can only change expected inflation by shifting market beliefs about what it will do some years down the road — by credibly promising to be irresponsible, as I put it way back when — which is a much more iffy task.

And ends:

So the zero lower bound does matter. By all means, let’s harass the Fed from the left, and demand that it do more. But I hope it’s possible to accept simultaneously the insight that the Fed could and should do more, and that it’s hard at the zero lower bound, and it would really help if the Fed had fiscal help.

The ZLB matters only because the discussion has equated monetary policy with setting an interest rate (FF) that has dropped to “zero” so that it´s not operative. But it doesn´t have to be so. The Fed could set a target other than an inflation target, which has for many years been “married” to the interest rate target.

The guys were right in spending a lot of time over the last 12 years discussing “The conduct of monetary policy in a low inflation environment”, which, incidentally is “proof” that “targeting inflation” through the intermediate target of interest rates was not perceived as robust.

A target such as a nominal GDP level target is NOT a promise to be irresponsible. It has the additional advantage that it dispenses with “help” from fiscal policy, something that only “muddies” the waters as the last few years have shown.

In an earlier post Krugman conclude the discussion about Bernanke´s “turn-about” after becoming Fed Chair with (where Menu B is composed of such dishes as “keeping rates low for long” and Menu A is composed of dishes such as “higher inflation target”)

You can see where I’m going here. Menu B is, if you like, safer for the Fed than Menu A, because it is defined in terms of actions rather than results; the Fed can point to what it is doing, rather than announce a target for long-term rates or inflation that it might fail to hit. So Menu B serves institutional objectives better. Unfortunately, it doesn’t do the job for the economy. To be fair, we don’t know that Menu A would, in fact, be sufficient. But Benanke the Younger — BB before he was assimilated by the Fedborg — would have said that this was no reason not to try.

Maybe BB still thinks the same way as when young. Check this answer to a question after his first press conference one year ago:

Mr. Chairman, [Carmen Reinhart and Kenneth Rogoff] wrote a book looking at 800 years of financial history and discovered when you have a financial crisis it takes a lot longer for the economy to recover.

Are people expecting too much from the Federal Reserve in terms of helping the economy recover? Has that complicated your monetary policy making?

Mr. Bernanke wasn’t ready to concede that the Fed is quite as powerless as the questioner suggested:

I enjoyed that book very much. I thought it was informative and as you say, it makes the point that as a historical matter, recoveries following a financial crisis tend to be slow.

What the book didn’t do is give a full explanation of why that’s the case. Part of it has to do with the problems in credit markets. My own research when I was in academia focused a good deal on the problems in credit markets on recoveries.

Other aspects would include the effects of credit problems on areas like housing and so on. We are seeing all that, of course, in our economy.

That said, another possible explanation for the slow recovery from financial crises might be that policy responses were not adequate. That the recapitalization of the banking system, the restoration of credit flows and the monetary fiscal policies were not sufficient to get as quick a recovery as might otherwise have been possible.

And so we haven’t allowed that historical fact to dissuade us from doing all we can to support a strong recovery. That being said it is a relatively slow recovery.

What exactly does the “might otherwise” refer to? Maybe stuff he recommended to Japan 13 years ago? Things like setting a price level target – which FDR did and had immediate success in turning the economy around? And he has mentioned NGDP targeting at one time or another.

Bottom line: he knows there are alternatives. He knows, contrary to Krugman, that the ZLB for interest rates is not binding. But he still doesn´t take appropriate action!

Update: Nick Rowe has a much better post on this topic:

The natural rate of interest is not a number; it’s a time-path. And the central bank doesn’t observe that time-path, so when it sets the actual rate it will almost always miss the natural rate time-path. And when the economy is off that time-path, that will cause the time-path to shift. Because expectations will change. And because reality will change too, as investment changes and capital stocks (understood in the broadest sense to include human capital and the stock of employment relations) change too. So, while useful as a theoretical concept, the natural rate of interest is perhaps not so useful as a practical guide to monetary policy as the Neo-Wicksellian approach requires.

Which is perhaps why all of us, central banks especially, should stop framing monetary policy in terms of interest rates. Setting interest rates is not what central banks really really do. It’s a social construction of what they do. When central banks talk about setting interest rates that is only a communications strategy, and not a very good communications strategy, especially at times like this.

Martin Wolff, talking sense & Godwin´s Law

In the FT Martin Wolff writes:

What is the correct approach to fiscal and monetary policy when an economy is depressed and the central bank’s rate of interest is close to zero? Does the independence of the central bank make it more difficult to reach the right decisions? These are two enormously important questions raised by current circumstances in the US, the eurozone, Japan and the UK.

In Part 1 he discusses the McCulley-Pozsnar paper:

The conclusion of the McCulley-Pozsar paper is, in brief, that aggressive fiscal policy does work in the unusual circumstances of a liquidity trap, particularly if combined with monetization. But conventional wisdom blocks full use of the unorthodox tool kit. Historically, political pressure has destroyed such resistance. Political pressure drove the UK off gold in 1931. But it also brought Hitler to power in Germany in 1933. The eurozone should take note.

According to Godwin´s Law, the argument was lost when he mentioned Hitler (or Nazis). So I found it interesting that Brad Delong should “root” for Wolff´s article when just yesterday he alleged Acemoglu and Robinson had no argument because they mentioned Hitler!:

Paul Krugman and Robin Wells have an interesting article in the Occupy Handbook…. Krugman and Wells… [argue] that the huge increase in income inequality has also had major political consequences… the main corrosive effect of this inequality is in preventing Keynesian policies to combat the recession 2007-2008 and the sharp increase in unemployment that resulted… Though intriguing, this idea is not backed up…. [T]he distinction between “right” and “left”… is not a natural one when it comes to Keynesian economics and policies. Many conservative politicians, and not just Nixon and Reagan, have embraced Keynesian economics…. [A]n economic history of Nazi Germany by Dan P. Silverman is entitled *Hitler’s Economy: Nazi Work Creation Program, 1933-1936…

To which De Long says:

On the internet, any declaration that a position usually seen as left-wing in some sense–vegetarianism, say–is actually not left-wing at all because IT WAS SUPPORTED BY HILTRE!!1! is greeted with raucous laughter, and taken as an admission that you have no good arguments.

But really the arguments, both from McCulley-Pozsar and De Long-Summer, are not good simply because they are based on a “Liquidity Trap” myth and don´t hold outside this mythical state.

This becomes clear when you ask the question: Why did the economy become depressed and interest rates got close to zero”?

One argument, favored by Milton Friedman, would be that low rates are indicative that monetary policy has been tight. And we know that a tight monetary policy depresses the economy.

Interestingly, by saying interest rates are going to remain low for years, the Fed is actually saying it will maintain the economy depressed going forward!

Update: One year ago, in the Q&A after Bernanke´s first press conference an interesting question came up (HT C. Rampell):

Mr. Chairman, [Carmen Reinhart and Kenneth Rogoff] wrote a book looking at 800 years of financial history and discovered when you have a financial crisis it takes a lot longer for the economy to recover.

Are people expecting too much from the Federal Reserve in terms of helping the economy recover? Has that complicated your monetary policy making?

Mr. Bernanke wasn’t ready to concede that the Fed is quite as powerless as the questioner suggested:

I enjoyed that book very much. I thought it was informative and as you say, it makes the point that as a historical matter, recoveries following a financial crisis tend to be slow.

What the book didn’t do is give a full explanation of why that’s the case. Part of it has to do with the problems in credit markets. My own research when I was in academia focused a good deal on the problems in credit markets on recoveries.

Other aspects would include the effects of credit problems on areas like housing and so on. We are seeing all that, of course, in our economy.

That said, another possible explanation for the slow recovery from financial crises might be that policy responses were not adequate. That the recapitalization of the banking system, the restoration of credit flows and the monetary fiscal policies were not sufficient to get as quick a recovery as might otherwise have been possible.

And so we haven’t allowed that historical fact to dissuade us from doing all we can to support a strong recovery. That being said it is a relatively slow recovery.

IT should not be “might be” but “was” due to inadequate policy responses. More, the slump itself was the result of inadequate monetary policy, which first was focused on oil and commodity prices and when the “sh—hit the fan” was all focused on “saving banks”.

And he thinks the Fed´s doing all it can to support a strong recovery? You must be joking, Mr. Bernanke.

At the whim of winds

Optimism over the winter was weather related. Nothing like a mild winter to raise spirits. But new winds are blowing and clouds are darkening. The NYT reports:

WASHINGTON — Some of the same spoilers that interrupted the recovery in 2010 and 2011 have emerged again, raising fears that the winter’s economic strength might dissipate in the spring.

In recent weeks, European bond yields have started climbing. In the United States and elsewhere, high oil prices have sapped spending power. American employers remain skittish about hiring new workers, and new claims for unemployment insurance have risen. And stocks have declined.

There is a “light recovery blowing in a spring wind” with “dark clouds on the horizon,” Christine Lagarde, managing director of the International Monetary Fund, said Thursday, at the start of meetings here that will focus on Europe’s troubles and global growth. Ms. Lagarde implored world leaders not to become complacent.

But if you stop a minute to think about it, all this should not be surprising. Politically, there´s a stand-off everywhere you look. Be it health care, fiscal policy or, most importantly, monetary policy. And these stand-offs are even worse over the Atlantic. Don´t doubt for a minute that this strongly influences decisions even in bodies, like the Federal Reserve, which are supposed to be “independent”.

Everywhere, ideology and thus dogmatism has substituted for pragmatism. So, for example, we are left with bland statements about keeping interest rates low for a long time, not even realizing that what that´s signaling is that the policymakers expect that the economy will continue to remain depressed!

House prices peaked six years ago. The financial crisis took off five years ago. Children born about that time are about to enter first grade! The Fed let nominal spending “dive” almost four years ago. Time´s passing and we´re still “blowing in the wind”.

Spell it out Matt! You know it´s not about a higher inflation target.

Matt Yglesias has an interesting post that discusses how the zero (bound) matters because rules matter:

This, I think, is why zero matters. It is true that there are lots of different ways the Fed can do. But during the Great Moderation the thing the Fed did do was stabilize the macroeconomy by cutting interest rates. Everyone anticipated the Fed’s behavior to follow a Taylor-type rule in which inflation and unemployment data determined interest rates. You would read paradoxical-sounding stories about the stock market jumping on disappointing jobs data, precisely because everyone felt they understood how everything worked. The problem with the zero lower bound then becomes that as rates got closer and closer to zero nobody knew what was going to happen. People in the know knew that students of monetary theory had proposed a variety of possible central bank measures at zero. But Ben Bernanke didn’t explicitly write down “this is the Federal Reserve’s plan of action if unemployment is high and interest rates hit zero” and then display it for all to see behind some “in case of emergency, break glass” windowpane. In other words, it was the reverse of Y2K. We knew something would happen but nobody knew what. So when rates did hit zero, expectations became unmoored.

(Note: His argument was developed after reading this post by Evan Soltas.)

It´s true that BB didn´t explicitly write down any of the proposed alternatives for the situation where unemployment is high and interest rates hit zero, which had been discussed for many years under the caption “How to conduct monetary policy in a low inflation environment”. But implicitly he did by writing on alternatives for Japanese monetary policy and on “Deflation, making sure “it” doesn´t happen here”, for which he got nicknamed “Helicopter Ben”!

Evan´s “natural monetary experiment” is Y2K, something that everyone expected but didn´t happen. Another such “experiment”, different because no one expected and it did happen, was 9/11 less than two years later. Interestingly, the Fed reacted in the same way, providing enough excess reserves so that monetary equilibrium and, therefore, stability in nominal spending (NGDP Level) was maintained.

At the end, Matt writes:

I say all this, I note, not to argue that we need to scrap paper money. The point is that it’s very bad for the Fed to have a policy rule that breaks down in moments of severe crisis. It’s like having an umbrella that dissolves in water. We either need to run a background level of inflation that’s high enough to avoid zero bound episodes, or else shift the policy lever to something that’s not affected by these issues.

Instead of explicitly mentioning higher inflation targeting, he could have substituted that for explicitly defining the “policy lever that´s not affected by these issues”. And I bet that what he has in mind is an NGDP Level Target.

Economists as “peddlers” of views/theories

I just realized I´ve been using the “peddler” description a lot, like in:

  • John Taylor “peddles” the “Taylor Rule”
  • Paul Krugman “peddles” the “Liquidity Trap”
  • Delong/Summers “peddle” “Self-Financing Deficits”
  • Edmund Phelps “peddles” “Structural Slumps”

But the tragic moment came about when Ben Bernanke, with the power to act on it, “peddled” his “non-monetary effects of the financial crisis in the transmission of the Great Depression”.

His reasoning was written down almost 30 years ago:

The last part is not quite right. It wasn´t the “New Deal” that rehabilitated the financial system, but FDR´s March 1933 decision to de-link from gold and inflate, stating a price level target. The result was that the last bout of banking failures in the spring of 1933 did not affect the economy like the previous ones.

Maybe Bernanke´s “bias” is the reason David Beckworth upped Christy Romer´s clamor for Bernanke to have a “Volcker moment” and suggested Obama have a “FDR moment”:

Maybe it is time for us to admit that Bernanke will never have his Volcker moment.  He has had many opportunities and whether because of groupthink at the Fed, political power of savers, or a failure by him to read Scott Sumner’s blog, Bernanke cannot seem to find his Volcker moment.  It is not clear he ever will.  So instead of hoping Bernanke has a Volker moment, maybe we should be hoping for President Obama to have a FDR moment.

The FDR moment occurred in 1933 when FDR took the reins of monetary policy from an ineffective Fed and sparked a robust recovery in aggregate demand.   The Fed had allowed aggregate demand to collapse for three years when FDR responded.  He signaled that he wanted the price level to return to its pre-crisis level (i.e. increased expectations of higher nominal spending) and acted upon it by having the Treasury Department devalue the gold content of the dollar.  This dramatically increased the monetary base and spurred a sharp increase in aggregate demand.

Let´s keep wishing and hoping…

The harm a Nobel Prize can do: The case of Edmund Phelps

Both Karl Smith at Modeled Behavior and Russ Roberts at Cafe Hayek today took on remarks by Edmund Phelps made last November on the Keynes-Hayek debate. Both single out the ending:

What now do we do? With some luck, the economy will “recover” through a return of investment activity to sustainable levels once some capital stocks, like houses, have been worked down. But it will not recover to a strong level of business activity unless something happens to boost innovation. The great question is how best to get innovators humming again through the breadth of the land. Hayek himself said little on innovation. But at least he had an applicable theory of how a healthy economy works.

The Keynesians, sad to say, show no understanding of how the economy works. They think they can lever employment up or down by pushing buttons – as if the economy were hydraulic. They show no grasp of the concepts that would be necessary to restore us to prosperity and flourishing. In an old image that applies well to the posturing of today’s self-styled Keynesians, “the Emperor has no clothes.”

Seems Phelps has become a “supply only matters” guy. But he gets it really wrong at the very start:

Keynes was a close observer of the British and American economies in an era in which their depressions were wholly or largely monetary in origin – Britain’s slump in the late 1920s after the price of the British currency was raised in terms of gold, and America’s Great Depression of the 1930s, when the world was not getting growth in the stock of gold to keep pace with productivity growth. In both cases, there was a huge fall of price level. Major deflation is a telltale symptom of a monetary problem.

Ever since, the followers of Keynes – the Keynesians, as they are called – see every slump as monetary. They suppose that behind the slump is a shortfall of liquidity and a resulting deficiency of ‘effective demand’ – an insufficient flow of money circulating through the affected economy to support the normal level of employment. So they always call for anti-deflation measures – for a “stimulus” to “demand.”

Sounds to me (David Glasner, what do you think?) he´s talking about Cassel and Hawtrey, not the Keynes of the GT.

As Nick Rowe has pointed: “Recessions (or depressions) are always and everywhere a monetary phenomenon”, just like inflation.

But all that is just to allow him to say:

It’s true that such a deficiency of liquidity occurred twice in recent US experience – hence an actual or incipient deficiency of aggregate demand. With the fall of Lehman in 2008, there was a rush to get into liquid assets. So the Keynesians (and everyone else) were right to urge the US central bank – the Fed – to create a massive increase of the money supply. Then, by spring 2010, another deficiency had developed – one of the Fed’s own making.

There was clear evidence of that in the fall of the inflation rate from the customary rate of 2% per annum to 0.9% in half a year’s time. The Fed had to engage in QE2 to get the inflation rate back up to 2% per annum.

These measures served to remedy a deficiency of liquidity and thus to forestall or remove a deficiency of effective demand.

The evidence: Inflation is running at about 2% again. The expected rate of inflation at 1.5% or so. Consequently, we do not have a “deficiency of demand” now!

And then he comes peddling his 1994 book “Structural Slumps”:

So what do we have? We have a structural slump! We are slowly coming out of a structural slump – thanks to structural forces, such as wealth decumulation and a build-up of untried ideas for innovation.

If the present slump is wholly or largely structural, Keynes’s theory of employment, since it’s monetary, does not apply to the slump.

He gets it wrong. The Fed provided liquidity to banks, but did not increase the money supply in order to match the increased money demand. Therefore, the monetary-induced, not structural, slump.

Back in 1985, long before receiving his Nobel, Phelps wrote a great Introductory Text called “Political Economy”. The preface reads:

This book is an introduction to economics for the university student and general reader. The focus, in common with other such texts, is on political economy. Economics arose in response to questions of political interest about the national economy; and though economics has since found other applications as well, it´s vitality and development continue to stem from this central concern. The causes and effects of the way society organizes and regulates its economy – and the resulting debates over instability, inequality, joblessness, inflation, organizational incentives, and the rest – are the main stuff of economics from here to China.

If Steve Waldman is right, we´re screwed!

To Steve Depression is a choice! We only thought that preferences were over growth and employment but suddenly, four years ago, demographics changed all that:

We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives.

Usually, economists are admirably catholic about the preferences of the objects they study. They infer desire by observing behavior, listening to what people do more than to what they say. But with respect to national polities, macroeconomists presume the existence of an overwhelming preference for GDP growth and full employment that simply does not exist. They act as though any other set of preferences would be unreasonable, unthinkable.

But the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything. All other considerations are secondary. These preferences are reflected in what the polities do, how they behave. They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary. The same preferences are reflected in what the polities omit to do. They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation. They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation. The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation. The purchasing power of holders of nominal debt must not be put at risk. That is the overriding preference, in context of which observed behavior is rational.

Maybe Steve´s making the wrong generalization. That´s not the preference of the “aging polities”, but the preference of the policymaker honcho himself: Dr. Ben Bernanke. He´s always made his views about the “credit view” of the monetary policy transmission process very clear (for a readable primer see here). That is very consistent with his behavior as soon as financial difficulties erupted with Paribas halting redemptions in three investment funds in early August 2007.

From that point on we witness the launching of a veritable soup bowl of letters (TAF, TSFL, TALF) and announcements of (almost) unlimited financial support to financial institutions.

And during all those months in both 2007 and 2008, Bernanke´s Fed forgot about the long term success (“Great Moderation”) that had been “acquired” through stabilizing NGDP along a level path.

So I take solace from the concluding paragraph in this Scott Sumner post:

During 1933 most of the experts on Wall Street railed against FDR’s dollar depreciation program, insisting it wouldn’t work.  Meanwhile traders drove stocks higher and higher as dollar depreciation triggered rapid growth in output.  In the 1970s high inflation drove stocks lower, even as Keynesian economists peddled their Phillips Curve theories.  Since 2008 lower inflation expectations have driven stocks lower, even as old-time monetarists insist there’s an inflationary time bomb waiting to explode.  That’s why we need to replace the FOMC with an NGDP futures targeting regime.  There are no hawks or doves on Wall Street, no ideologues.  Just realists.

Maybe they´ll soon assert their preferences.