On Market Monetarism

Over the past couple years I’ve gradually become a convert to a collection of ideas called market monetarism (MM), which espouses the notion we should do away with inflation targets and replace them with a nominal GDP level target (NGPLT, for short).  They seem to explain the current economic conditions better than Keynesian “liquidity trap” or traditional Austrian “confidence crisis” views — in the MM view, central banks can always inflate, and should do so in a way that seeks to keep nominal GDP on a stable growth path rather than being overly concerned with inflation targets, and when they fail to keep NGDPLT on a stable path the result is the low growth and difficult labor markets we’ve unfortunately become accustomed to recently.

The theory is also attractive on other grounds — for instance, one reason to not pay too much attention to inflation is that no one really knows what inflation is.  It’s a multivariate (applies to all goods),  multidimensional (every actor has their a different perspective on what money’s value is relative to a good), largely subjective (hedonics calculations are little more than guesswork at what people want) concept that can’t really be boiled down to a single meaningful number that we can aim at the entirety of economic activity for a year and say “This is how the price of all goods/services changed over that time.”  The reason to make the attempt to describe the change is obvious, but less obvious is why we should put our faith in the results to the extent of making the answer the basis of monetary policy — to two significant digits, no less.

The theory also explains something else that is odd — since 2008, the stock markets have become strongly correlated to monetary stimulus.  They seem to be saying “Right now we believe looser money means more growth.”  This is not a normal situation: the correlation is not there historically, and so it strongly suggests markets are seeing an overly deflationary environment right now.  This also helps explain why big companies like AAPL are sitting on huge piles of cash, while others are increasing dividends rather than re-investing: right now, cash is relatively more valuable against expected returns.

MM is gaining converts as its predictions seem to pan out.  As Scott Sumner put it:

 But how about a bit of hero worship for those economists who predicted inflation and interest rates would remain low, and who also predicted that the Swiss National Bank and the Bank of Japan could depreciate their currencies if they tried?  Even at the zero bound.

This will be an interesting year, with Japan finally raising its inflation target to 2% (not quite NGPLT but movement in the direction that NGDPLT would have indicated) in response to decades of very low NGDP growth.  If Japan succeeds, the US may finally consider a similar adjustment to its 2% target (the current policy of QE interventions has not produced much NGDP movement, because it amounts to standing on the brake of long-term expectations while flooring the gas on short-term action).

Meanwhile, Paul Krugman (whose commentary can actually make a fair amount of sense sometimes if you ignore everything even vaguely political) writes a post that perfectly expresses the problem with Paul Krugman posts:

But can the debate really be as one-sided as I portray it? Well, look at the results: again and again, people on the opposite side prove to have used bad logic, bad data, the wrong historical analogies, or all of the above. I’m Krugtron the Invincible!

At this point I am not so much in disagreement with Krugman as I am seriously concerned about his mental health. It’s fine to tell everyone you don’t read opposing arguments, it’s another to thereby deduce their nonexistence. It’s not as though Krugman hasn’t been wrong over and over and over on hugely important matters.  There are entire websites that are explicitly devoted to his wrongness.  Next, seemingly in self-parody, he claims the people who disagree with him are not necessarily stupid, just too political to be reasonable — remember, Paul Krugman is the guy who accused the Tea Party of being the KKK.  His lack of self-awareness would be troubling in a sixth-grader; if he’s the standard-bearer of Keynesianism, his inability to think critically is a terrible indictment of his ideology and its adherents.