In a recent post, Sumner declared that it is “next to impossible” to justify fiscal or monetary stimulus for the US when headline unemployment is at 4.9 percent.
I used the BoJ example of having doubled the base, and then added more, pushing their headline unemployment rate down from just around 4 percent when their version of QE began to about 3 percent according to current figures all without achieving the goal of 2 percent inflation as an example as to why next to impossible is still not impossible. What gives there?
A lot of people think they understand the concept of inflation. But the truth be told, the more I understand about various causes, the less I am sure the phenomenon of inflation is as well understood as it is perceived as being.
But really, I don’t believe we need to belabor the point if we apply common sense to what we already know about targeting headline inflation, things like having nailed down the origin of the financial crisis and Great Recession to a last-chance, missed opportunity to signal loser monetary policy ahead with a cut to the FF rate one mid-September afternoon in 2008, and understanding the mindset behind the decisions that were actually made.
The basic point of the matter is that if an estimate of just over 3 percent core PCE inflation in the year ahead puts under the skids the largest insurance company and investment banks on the planet, via disinflating them into bankruptcy, I’d say there is something wrong with the policy that produces such an unjustified, perverse and absurd result as to throw the entire baby out with the bath water, while the central bankers pat themselves on the back for a job well done in blaming the victims. How many times did Bernanke testify before Congress that what he saw at AIG made him angry?
I am at a loss for words as to why this monetary regime is accepted practice, and even worse, not only defended, but used to make some wild claims about stimuli and unemployment; even if I set aside all of the moral issues regarding what such a policy does to average people, and consider only what happened to the largest investment firms. Taking off the populist hat for just a moment, it is ultra-bad policy. Putting the hat back on, it really is no wonder people are asking where the new opportunities are because the policy took out anything resembling natural, free-market-based efficient allocation of resources. And Janet Yellen thinks she can pick stocks while we have historically low LFPR and microscopic inflation as far as they eye can see.
Even if one is of the view point that what happens to average people does not matter, that the more well off are the only important people, the rear-view mirror inflation targeting apologist is still a really hard part to convincingly play, because when monetary policy rains down, it rains on everyone. How does one actually go about unbreaking the AIG and Lehman eggs? It simply cannot be done, and there were countless well-off injured by their giant crashing sound, not only in the short run.
Can anyone say these people are better off than if PCE core were allowed to breech 3%? Yet it is apparently an okay thing to do to allow the virtually unchanged policy to continue as if 2008 never happened, even though we can imagine that the policy poses additional, much less obvious harm than large firm collapse under the present circumstances… And under the next bout of policy-induced economic stress, then what?
The problem isn’t whether we need stimulus of any sort. The real problem is monetary policy that was designed for dinosaurs around notions of inflation that simply are not well understood, and may be fatally flawed.
I like to believe in unicorns, but because I believe in them, it doesn’t make them real.