Even a Great Stagnation requires planning!

In a recent post, Nick Rowe gives a short reply to DeLong´s long post:

Suppose you lived in a world where, whenever the price level fell/rose by 1%, the central bank responded by decreasing/increasing the base money stock by the same 1%. A world like that would not have a long-run Omega point, from which some present equilibrium can be pinned down by back propagation induction.

That’s the sort of world we live in, under the inflation targeting regime. A drunk doing a random walk does not have a destination, from which we can infer his route by working backwards. His long run variance is infinite.

Stop arguing about whether a market macroeconomy is or is not inherently ultimately self-equilibratingIt’s a stupid question. It depends. It depends on the monetary regime.

Instead, let’s solve the stupid question by adopting a nominal level path target.

It´s even worse. If you don´t plan, i.e. provide a “destination” for it, even a “Great Stagnation” becomes “random”!

The charts illustrate.

Destination Required_1

Destination Required_2

The first shows why the “Great Moderation” happened. The “destination” was the trend level path, to which the economy returned after monetary policy mistakes dislodged it. Observe what many called a period of “too low for too long” rates doesn´t look like that at all!

In the second chart, we note that after the Fed pulled the economy down, it has been satisfied in keeping it down, i.e. “depressed”. It could come out and say that that´s the path (“destination”) it wants it to follow. But no, by saying it´s about time to “tighten” policy, it is implying that the path might be even lower. Is it A? Is it B? The truth is no one knows!

It certainly does not appear to be X!

Related: David Glasner, Scott Sumner

Is The Manhattan Institute Digging a Hole for the GOP?

A Benjamin Cole post

From David Glasner’s excellent blog, Uneasy Money, we learn that Stanford scholar John Taylor recently lectured the NY-based Manhattan Institute on the virtues of stable money, and that he will be followed this year by James Grant, the perennial doomster and gold fetishist. Grant will get $50k “Hayek Prize” for the chat, as did Taylor.

Grant, who has accurately predicted six out of the last zero U.S. hyperinflationary holocausts, will likely lecture the Manhattan Institute on the splendid 1921 recession, in which prices and wages tumbled, setting up a near-instant recovery, so that by 1923 everything was better than ever. The Fed existed, but did nothing, and that is the lesson, says Grant.

The GOP-right-wing today has so tightly embraced deflation, gold and Fed-bashing that nearly erased from history is that the Nixonians and Reaganauts wanted looser money (as I have documented in this space), and that Reagan’s Treasury Secretary Don Regan went so far as to propose putting the Fed under wing at the Treasury where it would report to him, and not then-Chairman Paul Volcker, inflation-fighter.

Thus, this modern-day GOP devotion to gold and salubrious deflationary recessions is historically recent—but is it mere posturing? We can hope.

2016: A GOP Sweep?

Pending is 2016, and the potential of another GOP sweep in Washington, D.C., ala 2000, when the GOP captured the House, Senate, and White House, and owned the Supreme Court too.

The last thing gimlet-eyed GOP operatives (assuming some are left) want after they get power in 2016 is a 2008 replay, when the Fed tightened, the economy collapsed, and the American public was so disenchanted they voted in an unknown, pretty-talking, skinny black man with a Islamic surname to be U.S. President. That is very disenchanted.

But with each of these tight-money-love-ins such as the Manhattan Institute pow-wows, and with each lifetime pledge of fidelity to gold that GOP candidates chisel into granite on the campaign trail, the harder it will be to gun the money presses after 2016.


Of course, maybe there is no problem. I am thinking like a human with some shreds of honor left, not a pol. After all, the GOP endlessly rhapsodizes about fiscal rectitude, but changes the mantra to “deficits don’t matter” whenever they control the federal purse.

Still, going forward, nothing but QE will probably work (see Japan) and that is rather obviously “printing money.” And big-time QE is rather obviously a long, long way from genuflecting to gold on the White House lawn, while James Grant looks prayerfully skywards.

So, I suspect the GOP will have to pass some sort of tax cuts (however minimal), a few regulatory changes, and then say that because structural impediments have been removed, the time has come to “gear America up.” That’s not a bad catchphrase, btw. “Gear America Up.” I hope the GOP is reading.

And then the GOP will print lots of money. I mean, boatloads of the stuff, like going over Niagara Falls in a record wet year. And indeed, I hope they do. I do not think the U.S. economy is inflation-prone. See Japan.

2016 could be a very good year.

PS. The Donks are no better than the GOP, and maybe worse.

PPS. Manhattan Institute: For $50,000 I will take the first Greyhound bus to NYC, and deliver the best speech ever made for tight money, lower taxes, radically diminished regulations and ______________. You can fill in the blank.