My jaw dropped when I noticed a headline saying that 3Q GDP has been revised to 4.1%. It doesn’t seem right given that NGDP is growing at an average annual rate of 4% (and has been slowing over recent months) and inflation is approximately 1%. The back-of-the-envelope math just doesn’t work out. I suppose anything is possible and GDP reports for Q1-2 were wrong, nearly zero. And it would make sense for “normal” in a 4% NGDP growth and 1% inflation environment to be less than 1% growth in a quarter. That’s just the way it is; and it’s the very reason Market Monetarists have been saying we need not only more NGDP growth, but to return to trend and stay there. There’s a tradeoff for centrally engineered, microscopic inflation rates and that is growth potential depending on what’s going on with the labor force.
The seeming lack of understanding of this point is something I find baffling about the debate regarding monetary policy in recent years. There are so many people against the idea of centralized planning but this whole idea of the central bank putting a lid on all prices regardless of supply side factors driving changes in prices is not only acceptable but the only choice. As it turns out, it really is a very painful form of cognitive dissonance – and it’s maddening for those who can grasp just how bad of an idea it is. If honest quarter growth reports that reflect 4.1% growth are desired, there must be more NGDP growth and forget about the price increase gestapo. That is, at least, my two cents worth.
Of course low growth after a calamitous recession can be translated into all sorts of other problems; and it’s interesting how these things just sort of appear out of the blue. I am a purse fanatic and I’ve noticed the recent trend in cross-body purses recently. It really isn’t my kind of thing, and I wouldn’t buy one. But I did have a chance to have a discussion with a designer recently who gave me her take on the trend, telling me that it is a security feature more than anything else. She is from New York City, and there aren’t many places one can go there without worrying about what might happen to one’s purse. The example she gave was going to a diner and being instructed by the hostess to keep her purse on her lap. She said it inspired her to design a cross-body that is trendy, functional, and doesn’t get in the way while allowing some piece of mind. And I don’t think I will ever look at cross-body purses in the same way again. I think it should be called the Bernanke as he has been trend-setting in many more ways than one.