In Fedspeak NGDP portfolio, Nick Rowe talks about the things we don't know.
He says we don't know "the relative strengths" of the trade-off between "(expected) inflation" and "(expected) real growth".
He says we don't know the timing of the effects of an "increase in expected inflation".
He says, "We do not have a good theory of how short run supply shocks shift the [Short Run Phillips Curve]. And we do not know what short run supply shocks there will be..."
"If we did know" all those things, Rowe says, "We would know how much inflation would be associated with a higher level of NGDP".
"But we don't know," he adds.
Nick Rowe seems less concerned about finding out those things than he does about pushing the NGDP Targeting agenda:
"A higher NGDP target is like a portfolio of inflation and real growth, and when you are uncertain a portfolio of two assets is usually better than a single asset. Eggs and baskets stuff."
"An inflation target to escape the Zero Lower Bound seems like putting all your eggs in one basket."
"An NGDP target is more like putting half your eggs in the inflation basket and half your eggs in the real growth basket. One basket should work, even if the other fails."
I guess he's pushing the NGDP Targeting agenda. Doesn't sound like it, really.
"Expected inflation goes up, expected real interest rates go down, Aggregate Demand goes up, actual inflation goes up, and validates the increase in expected inflation. And real income goes up, maybe by just the right amount, or maybe too little, or maybe too much. It could be far too little, or far too much..."
"That's the best I can do, for now."
Nick and his NGDP Targeting compadres are not even in the right ballpark.
The problem is not that prices are too low. The problem is that growth is too slow. There is only one correct focus, and it is to understand the reason growth is slow.
For the record, as long as economists continue to dismiss out of hand the possibility that excessive private sector debt is the reason growth is slow, economists will continue to fail to understand slow growth. They will be able to say only things like "But we don't know" and "That's the best I can do".
4 comments:
"Nick and his NGDP Targeting compadres are not even in the right ballpark.
The problem is not that prices are too low. The problem is that growth is too slow. There is only one correct focus, and it is to understand the reason growth is slow.
For the record, as long as economists continue to dismiss out of hand the possibility that excessive private sector debt is the reason growth is slow, economists will continue to fail to understand slow growth. They will be able to say only things like "But we don't know" and "That's the best I can do"
Well put.
If it was all "just" a matter of prices being too low, why wouldnt one just simply advocate for price controls? Just let Ben, Barack or whoever tell everyone what the right price of x should be to get things back on track. Now of course they would call that intervening in the freemarket and distorting price signals........ but if you are able to credibly claim that prices are too low, how do you know? How could you possibly know the right price outside of a market set price? What right do you have to clam that 2006 house prices were right and now they are too low? Or stock prices? Or oil prices?
You have been correct to focus on private sector debt all this time Art. The question is where does the confusion lie? I say its in confusing what a bank does. A bank doesnt connect savers with borrowers like the neoclassicals and monetarist try to model it . If that was all they did, their models would be correct and concerns about private sector debt levels would be less grave (One could still theoretically get to a point like a poker game where one guy has 90 % of chips and the other nine dont have enough to make an ante) and the answer would simply be to redistribute. But since banks are not intermediaries but in fact creditmoney creators (from scratch) there is no way to "just" redistribute. Most of the money in the economy is credit money how do you give me your excess credit money? Most of the dollars in circulation are attached to a bank loan somewhere, the only ones that arent are the ones attached to federal bonds. Lord knows how loudly we are screaming about getting those federal bonds reduced.
We've reached a point where our incomes cant pay our debts in a timely enough manner to prevent further credit creation from cratering. Since credit creation is how we grow our economy the economy cant grow. Trying to raise everyones incomes with further credit creation wont work, it just adds to debt levels.
If I sit at 2/3 debt to income and add 4 to both Im now at 6/7 debt to income. Add 4 more and now at 10/11 debt to income. It is getting worse.
What the Nick Rowes think is that inflating housing prices or some other asset will make the bottom number bigger all by itself!! Which is silly. I dont relate my solvency or sense of financial well being to my income to house price level but my income to debt level. The Nicks want us to make the bottom number bigger so we will take on more debt, completely negating the increase in just the denominator. Such is the folly of a private credit driven system. It cannot build on itself without making itself more indebted
And Nick is considered, even by many of his critics, as
"one of the smartest guys around".
Thanks Greg.
I like that "add 4" analysis!
Yeah, the bank thing is confusing. I think they have to know, the neoclassicals and monetarists, that banks create money by making loans. My econ textbook from 1975 knew it. There's no secret about it, really.
Maybe "they" have not integrated that idea in with all the other ideas. Dunno.
"...there is no way to "just" redistribute. Most of the money in the economy is credit money. How do you give me your excess credit money?"
Physicists speak of particles that emerge from nothingness, in pairs, as if the particles were in some invisible dimension until they split, and then we could see them. (I don't think I'm making that up.)
I see creditmoney (nice word Greg!) creation as similar to that. A newly created creditmoney dollar is composed of two particles: the new money particle, and the new debt particle. Spending the money separates the two. The act of spending that money *IS* me giving you my creditmoney.
From the moment the new creditmoney is spent, the two particles are separated, and exist apart. The money particle goes where spending and saving take it. The debt particle remains with the borrower.
If a new creditmoney dollar happens to be saved, or spent in foreign lands, or ends up in the King's treasury (ha ha) then there is one less dollar of money than debt. When the music stops, someone will not be able to repay his debt.
I think I went off on a tangent :)
Not off tangent at all.
One thingI neglected to point out was that usually our income is less than our debt and we typically express the ratio the other way. Many ratios are something like 1/3 (40,000 income 120,000 mortgage).
Now most folks have more than a mortgage so its more, but if you use creditmoney of 40,000 to raise both, now to 80,000 and to 160,000 it looks better because now your income is now half your debt, but that only holds for a year. Next year unless you borrow another 40,000 to keep income at 80,000 you will now fall to 40,000 income and 160,000 of debt....... 1/4. A sugar high from the initial credit money and then the downer of worse income debt ratio the next year.
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