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Sumner on the Mystery of Bernanke

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Scott Sumner is the latest intellectual detective on the Bernanke case.  The crucial clue is a 2003 piece by Bernanke himself, which states:
Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation.
Sumner's analysis:
That's "only by looking" folks.  That means there is no other way. Money supply won't work.  Interest rates won't work.  Only NGDP or inflation can tell you the stance of monetary policy.
So what actually happened to NGDP?
Now all that remains is to ascertain the rate of NGDP growth since the second quarter of 2008:  6.1%.

That is not a 6.1% annual growth rate, that's the total growth in NGDP since 2008:2.  And when was the last time NGDP grew that slowly over a 3 1/2 half year period?  Hint: Herbert Hoover was President at the time.

How about inflation?
[T]otal inflation between July 2008 and January 2012:  3.8% That's not 3.8% CPI inflation at an annual rate over the past 3 and 1/2 years (which would still be lower that the rate Volcker produced in the mid-1980s) it's a total increase of the CPI of 3.8% over 3 and 1/2 years, barely 1% per annum!
What does this mean for the mystery of Bernanke?
Interestingly, Bernanke is no longer a market monetarist, at least in public.  He now likes to emphasize at press conferences how extraordinarily accommodative Fed policy has been since 2008.  But that's not what he really believes.  That's what a man in his position is forced to say.
When a thinker as charitable as Sumner says such things, I believe him.


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COMMENTS (4 to date)
Rick Hull writes:

Bernanke > Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation.

Sumner > That's "only by looking" folks. That means there is no other way. Money supply won't work.

Is money supply not a macroeconomic indicator?

Liberal Roman writes:

Considered alone, money supply is a meaningless indicator. You have to consider money supply & money demand for it to mean anything. So, basically I am saying you have to consider money price which is the inverse of the price of credit.

Money is expensive now and was very expensive in the winter of 2008/2009.

von Pepe writes:

Hold it. So, he is a market monetarist unless it doesn't work and then he is not a market monetarist? Very Sumnerian.

Mike Rulle writes:

"Interestingly, Bernanke is no longer a market monetarist, at least in public. He now likes to emphasize at press conferences how extraordinarily accommodative Fed policy has been since 2008. But that's not what he really believes. That's what a man in his position is forced to say."

I am not exactly sure what Scott's point is other than Bernanke is denying in public what he realizes now was insufficient easing by the Fed. So maybe Bernanke is being protectively defensive (that would be shocking for an appointed official!). But nothing is forcing Bernanke from doing what he "really" believes should be done going forward. What could he be afraid of, complaints from Ron Paul? I can understand that Bernanke may realize he overstated what he believed was easing, but may not have been---(given the premise of Scott S. that Bernanke does in fact believe in NGDP targeting, implicitly at least).

But then why not keep "easing" now? Isnt NGDP a delayed response to monetary policy? How does one know whether one has eased enough until much time has passed? We do not yet have those futures contracts Scott wants.

But, superficially at least, it appeared the Fed was massively easing by historical measures. It tripled its balance sheet and we now have the two year at 29 bps with promises to keep Fed Funds at current rate for 2 years. I don't know how Fed can directly impact velocity. The Fed could put zero or even negative rates on reserves----true. Clearly Fed policy to date has not yet increased NGDP at a fast enough rate. But would anyone have predicted 3.5 years ago that what the Fed has done would have been insufficient to create nominal growth?

And nothing prevents Fed from more easing going forward if NGDP is what it seeks to target. Buy another $trillion, put negative reserve rates in, etc.. Will that work? Don't know. It would be a bizarre person indeed to stick to a policy one knows will fail, if Bernanke does in fact believe in NGDP targeting.

I think the problem is fiscal and promises by B. Obama to tax and regulate even more, not that the Fed should have quadrupled its balance sheet. When real savings are depleting I am unclear how NGDP gets us out of the hole.

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