Santa, it´s not more inflation we want. It´s more Nominal Spending

Bloomberg tells us “A Little More Inflation Would Be Good for Everyone”:

Thirty years ago, any policy maker would have welcomed a run of inflation below 2 percent. But the less inflation there is, the lower central-bank rates will be, making a return trip to zero more likely. That would force officials to resort, once again, to unconventional tools such as bond-buying that can be politically unpopular and less effective in restoring jobs and growth.

“We’re not saying goodbye forever to the zero lower-bound and the problems that it causes,” former U.S. Treasury Secretary Lawrence Summers told Bloomberg on Dec. 15. “When we get to recession, we usually need 300 basis points or more of Fed easing, but there’s simply not going to be room for that.”

Those are not good arguments. The charts show that:

1 There´s not much difference in the behavior of inflation in 1996-04 and 2010-15. In both instances they were mostly below “target”. But no one worried about “too low” inflation 10 or 20 years ago!

2 The big difference is in the behavior of nominal spending (NGDP) growth and its level


It seems, therefore, logical to root for an increase in the level of spending followed by a stable growth rate (open for discussion are the establishment of both the target level of nominal spending and its stable growth rate)

And as the charts also indicate, that´s a job the Fed can do if it sets its mind to!

One thought on “Santa, it´s not more inflation we want. It´s more Nominal Spending

  1. It bothers me that people continue to call QE “unconventional”. Under “normal conditions”, with positive short rates, the Fed still does something like QE: If market rates slip higher, the Fed lends overnight (e.g. buys short term private credit). And it does that indefinitely if it is needed in order to keep the rate on target. In the end, absent maturity differences, all Fed actions are QE or QE reversal…

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