“Untrue truths”

In “An Unconventional Truth” Roubini writes a lot about “unconventional” monetary policy but concludes that what is needed is more fiscal policy:

Who would have thought that six years after the global financial crisis, most advanced economies would still be swimming in an alphabet soup – ZIRP, QE, CE, FG, NDR, and U-FX Int – of unconventional monetary policies? No central bank had considered any of these measures (zero interest rate policy, quantitative easing, credit easing, forward guidance, negative deposit rate, and unlimited foreign exchange intervention, respectively) before 2008. Today, they have become a staple of policymakers’ toolkits.

One result of this global monetary-policy activism has been a rebellion among pseudo-economists and market hacks in recent years. This assortment of “Austrian” economists, radical monetarists, gold bugs, and Bitcoin fanatics has repeatedly warned that such a massive increase in global liquidity would lead to hyperinflation, the US dollar’s collapse, sky-high gold prices, and the eventual demise of fiat currencies at the hands of digital krypto-currency counterparts.

To be sure, most of the doomsayers have barely any knowledge of basic economics. But that has not stopped their views from informing the public debate. So it is worth asking why their predictions have been so spectacularly wrong.

The root of their error lies in their confusion of cause and effect. The reason why central banks have increasingly embraced unconventional monetary policies is that the post-2008 recovery has been extremely anemic. Such policies have been needed to counter the deflationary pressures caused by the need for painful deleveraging in the wake of large buildups of public and private debt.

And ends up:

All of this adds up to a recipe for continued slow growth, secular stagnation, disinflation, and even deflation. That is why, in the absence of appropriate fiscal policies to address insufficient aggregate demand, unconventional monetary policies will remain a central feature of the macroeconomic landscape.

If he (and most others) concentrated on finding out why the post 2008 recovery has been so anemic, he would come to the conclusion that it is not an “alphabet soup of letters”, that comprise what has become known as “unconventional” monetary policy that is needed, even if supplemented by “appropriate fiscal policies”, but a change in the monetary policy regime, from one that practices interest rate targeting coupled with an inflation target, both of which are quite useless at present (interest rates at the ZLB and inflation way below target), to a regime that targets a level path for NGDP!

In such a regime fiscal policies for stabilization purposes have absolutely no use. In addition, no one will talk anymore about dangers of reaching the ZLB or even of a liquidity trap.


4 thoughts on ““Untrue truths”

  1. If an anorexic does not gain weight despite half-heartedly following your advice to eat more, then obviously eating more is not the solution.
    So why more QE?

  2. There is a groundswell amongst quite a lot of financial-type economists like Roubini, leading US business people, both bankers and non-bankers, the GOP(?), and clearly inside the Fed too, that a rate rise would be a good move. They are all going to have to learn the hard way. Or rather they won’t as almost all of them are already in the top 1% of earners or owners; the mass of the population will learn the hard way about the low quality thinking of their leaders. The markets are saying something else and should not be ignored. There is no better time for an NGDP Futures market.

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