It’s obvious that nobody asked me (why would they?). But my opinion of the state of MM is that somewhere in the synthesis into mainstream macro it has gone off on the wrong track after never having achieved consensus on some of more important aspects of the theory, such as an acceptable trend growth rate of NDGP.
This is a big problem when getting down to the basic definition and identification of the stance of monetary policy because where to start the NGDP trend line, the measuring stick if you will, is far from clear.
I first grabbed a decade worth of NGDP data, stuck it in my Excel spreadsheet, created my graph, and noticed that the persistent, excessively tight money from earlier in the decade was impacting the trend line calculations, starting in at 2% – ouch!
It’s not like I am particularly interested in providing a pass to the present crop of Fedseters for the missteps of those in the past by including the periods of excessively tight money in my trend line. So, I lopped off the first 4 quarters of the decade from the data set.
Even then, having the trend line start just below 3%, I wasn’t satisfied using it to asses the policy stance of the present. I am unsure how to cope with a perennially “nastified” NGDP growth trend line for the present decade, and it doesn’t seem all that reasonable to go back another decade in time.
Consequently, the only smoking gun here is the fact that the trend line is on the lower side of low compared to NGDP growth trends from earlier decades, anywhere from one to three per-cent difference. And if one considers that MV=PY (or MV=NGDP), the point that money has been tighter over the course of the present decade than in those of the past is rather obvious.
Those bygones of tight-bias in simple growth rate inflation targeting add up in some combination of reductions in P and Y (price increases and real growth); and certainly, those who feel that rather vague but profound something missing from the present in comparison to the past have proven those who believe one can’t miss what one will never have completely wrong.
You’re probably thinking that I am following my passion into
the weeds of melodrama here, but the last point is an important one in the data
analysis problem I am experiencing. In Market Monetarism, the past is a critical
factor in judging the present stance of monetary policy that can be considered
in the intellectual and political sense. Is the monetary authority doing the
right thing, right here and right now, against the backdrop of a feeling of loss
in a deeper political sense?
Others have their own opinions about what the doing right thing is as far as monetary policy is concerned and most may look at this graph and believe that everything is just peachy or at least justifiable. But I don’t consider a state in which the NDGP growth rate whizzes up and down, mostly down, around the “nasified” trend line as if yesterday no longer matters and is depicted here in my graph the right thing.
The Fed’s new normal of not-quite-as-tight sucks in many more ways than one, starting with the notion that there has never been a political consensus on the trade off involved in doing explicit, simple growth rate inflation targeting, and we see that trade off right here in the trend line. Less is less, not more – and there hasn’t been any public discourse, let alone consensus, regarding the permanence of it.
When I look around at the political realities of the day, the rise of the far right and far left complete with incivility, government spending money hand-over-fist trying the fiscal approach to boost growth, to me, it appears that the trade off is still a big problem. That something missing is still missing.
I wonder about how much the comparative one to three per-cent variation in the NGDP growth trend costs society at large, and rather than put my finger on a specific amount of NGDP growth as being a proper measurement of monetary performance, I prefer the “whatever it takes” approach. Whatever it takes to satisfy and have the political extremes melt back into the background. To some, four per-cent is ideal, but as far as I can tell, it isn’t enough on the heels of persistently tight money to benefit political cohesion and reduce the many broad justifications for ever larger government that does nothing to assuage economic dissatisfaction at large.
Translating this into recommendation for the Committee meeting next week, I think that there is no time like the present to start doing the right thing by canning the explicit IT approach to policy and get the liquidity flowing until at least 5.5% NGDP growth rate is achieved. After getting there, let it go for 8 quarters, and then start considering bending it down slightly to 5%.