Thursday, October 21, 2010

Good Monetary News

The FOMC minutes last week contained a shocking phrase: they discussed NGDP targeting and there was not an immediate counterreaction of shoes pounding on the table. Bernanke also made some comments:
1.  He clearly stated that inflation could be too low.
2.  He strongly implied 2% is the right number.
3.  He suggested that current forecasts are for well below 2% inflation.
4.  He said that’s not good enough, policy needs to be more expansionary if inflation is expected to be too low at a time of 9.6% unemployment.
5.  The Fed needed to do something about this situation.
How did markets respond to such inflationary talk? Stocks have been rising over the last six weeks and immediately after the announcement created hundred of billions of dollars of wealth in the stock market.

Now the opponents of NGDP targeting are starting to get silly. Silly sometimes intentionally in terms of parody writing for one thing. Samuelson worries (and Yglesias responds) that the policies will be so successful that we will have growth and high inflation, so we'll have to mop up the money again. I'm more than happy to mop it up again - that's part of what NGDP targeting means. Inflation goes up, the Fed tightens again and keeps NGDP plugging along at a steady pace. Oh how I long for such a problem. Then there's the Mises Institute, but I'll deal with their argument in another post.

Yglesias also discusses the political economy of "helicopter drops" (print a bunch of money and mail everyone a check). Rather than angering voters because banks or bad mortgages or whoever else is unpopular gets bailed out, you can send a bailout to everyone. Responsible and lucky people get to spend (or invest) in any way that maximizes their utility and people in a bind (whether their own fault or others it mattereth not) can work on getting themselves out. It becomes a political winner, unlike TARP. Additionally, inflation is better than wage cuts for most people (and particularly most poor people) because their real debt shrinks with their real wages, while a wage cut increases the real burden of debt that priced in a stable inflation that has not appeared.

No comments:

Post a Comment