So I shamelessly “borrowed” a graph of the RGDP gap from Marcus Nunes, and I plan to make it the topic of my post today. I intend to follow one of my golden rules of less being much more and keeping the main point brief. But I’ll have to apologize in advance if I get lost along the way and it turns into one of my infamous rants where I end up claiming monetary policy has been conducted by bureaucrats who have lost all ability to reason due to mad cow disease.
So take my post from last week where explored the meaning of NGDP growth with the equation of exchange, add it to the one about the tariffs and the equation of exchange, plus this graph, and – BINGO! – there is the tradeoff – stable output for stable prices.
The Y in M*V=P*Y is the sacrifice for explicit price stability and gets no love at all. And it’s plain to see that it is a pretty costly orphan in the world of IT where spreading pain is ipso facto the name of the game. This is a quantification of how much the current, dysfunctional IT regime costs; and because it’s in aggregate, it means that everyone is paying it. Suppose the math is in the area of $4T. Assuming a population of around 350M people, it comes to about $11,500 per capita of forgone output (extra PB&J squishing out) – not exactly chump change. Looking at the graph, last year alone the gap was $4T and it just keeps getting wider.
This IT regime creates a world so perverse and absurd that a positive employment report causes noticeable market volatility with the expectation that the soft NGDP cap will get arbitrarily pulled down. Just like magic we are all made worse off because of reports we’re doing well that naturally turn to the next one saying we’re not doing as well as we thought. The punishment for doing well makes no sense at all. But it is an illustration nearly exactly matching the evidence of the soft NGDP cap in action. It’s the what, the how, and the why of RGDP assassination along with P – Colonel Powell did it in the study with the candlestick because he was afraid the 2% inflation ceiling would be breached.
Now please, do the math about how much better off you might be under this dysfunctional monetary regime compared to the absence of a regime that explicitly stabilizes prices. If I make the median income $50,000 per year and the average inflation rate over time is around 2% regardless of regime that comes to $1,000 of inflation per year. If the inflation rate under the rate ceiling regime is 1.2% on average that comes to $600. The IT people would say they are saving me $400. But it isn’t quite right because in order to stabilize inflation at that rate compared to the 2% average of doing something else, they had to cap output to the tune of $11,500 per capita (just for the last year!!). So for last year the cost would be $11,100 for a single person because I take both the inflation and forgone output instead of just inflation. It’s even more for a bigger household.
The elites and media are astounded someone like Trump could be elected president. I am not. Eleven and a half thousand dollars per capita in real terms is not chump change in my world. And frankly, I am well beyond having lost my patience with the theory that says we can’t miss what we’ll never have so do whatever you want and tell us it’s all for our own good.