Bernanke and the “Big Black Hole”

No matter the laudatory speeches by Bernanke himself or others about his tenure, the fact is that Bernanke has presided over the greatest monetary policy mistake of the post war period. It is worse than the monetary policy mistakes that gave rise to the great inflation because it has been much more costly in human terms, even giving rise to ideas about this being a “new normal”, with Alvin (‘Secular Stagnation’) Hansen´s name being upfront during the latest AEA meetings in Philadelphia.

The pictures below convey an interesting story. In the first I show the history of NGDP since 1950. Note the rising trend path during the Great Inflation (and that´s the reason the US experienced one). What at the time was called the Great Stagflation was just plain Inflation with real output staying mostly above the trend path as seen in the second picture.

Big Black Hole_1

Big Black Hole_2

The nominal aggregate NGDP is directly influenced (if not controlled) by monetary policy. If the Fed is doing its job well, as during the great moderation, the economy will experience overall nominal stability (inflation “on target” and real output “on potential”).

When the Fed ‘forgets’ its function of keeping overall nominal stability you may get different instabilities. If, as in the 1960s, it becomes mostly concerned with unemployment (4% was seen as the “target”) the result will be rising inflation. If, as when Bernanke took over, it becomes ‘paranoid’ about inflation (a difficult concept to begin with), the result will be rising unemployment/low employment, a.k.a. the “Great Recession Stagnation”.

6 thoughts on “Bernanke and the “Big Black Hole”

  1. “(Bernanke’s mistakes are) worse than the monetary policy mistakes that gave rise to the great inflation because (they have) been much more costly in human terms, even giving rise to ideas about this being a “new normal”, with Alvin (‘Secular Stagnation’) Hansen´s name being upfront during the latest AEA meetings in Philadelphia.”–Marcus Nunes.

    How nice it is to read Marcus Nunes, free of the dogma and politics and ideologies that seem to infect 90 percent of economists. I can attest Nunes is no left-winger, he is merely pointing out the truth.

    Even sadder, the USA economy was much more inflation-prone back in the 1960s an 1970s. I wonder if the Fed can generate much inflation at all in this economy, shorn of unions, engaged in global trade and competition, and with deregulated transportation and communication sectors, and with a top of MTR of 40 percent as opposed to 90 percent.

    The Bank of Japan seems to be failing to hit 1 percent inflation, let alone 2 percent, and the Fed is well failing to hit 2 percent inflation.

    Get it? The Western economics are not as inflation-prone as before.

    BTW, a stray thought: They always say “money is long-term neutral.”

    Really? What about Japan? Is 20 years long enough? If businesses cut back on investment for decades on end, then that starts to have a long-run impact–and businesses could cut back investment under a perma-tight monetary policy that suffocates growth.

  2. Hey Marcus.
    “What at the time was called the Great Stagflation was just plain Inflation with real output staying mostly above the trend path…”

    I don’t think it was called “great”
    I think it was just called stagflation.
    I don’t think the term referred to a long period.
    I think it referred to the fact that recessions or slowdowns were not effective in bringing inflation down near zero.

    I agree, economic performance was rather good, and would have been even better if not for those repeated, policy-induced recessions.

    Stagflation was important because it was a sign that something in the economy was not working the way economists understood the economy to work.

    That problem was never solved.

    • The economy has so many “Great” times… It’s a wonder things are not better than they are!

      Anyway, if they DID call it the Great Stagflation, then I think they were wrong, and it looks like I agree with your post on that.

      You wrote: “If the Fed is doing its job well, as during the great moderation, the economy will experience overall nominal stability…”

      Yeah… but… there were a lot of changes, beginning in the time between the two circles on your RGDP & Trend graph. Those changes affected the economic environment in different ways than the Fed. My feeling is that the economists at the Fed have a much better understanding of things than the politicians in Congress, and that Congress tilted the playing field in ways that made Fed policy less effective.
      (I offer no examples!)

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