Out of Control Policy Blog

Nominal GDP Targeting: Inflation and Misdirection

Goldman Sachs wants it, and now Obama’s ex-economic advisor, Christina Romer wants it: more “aggressive” easing and “beautiful” policy. In a previous post we pointed to the realization that nominal GDP targeting as called for by Goldman Sachs and now Christina Romer would cost upwards of $10 trillion over the next decade and balloon our nation’s debt. What is possibly more alarming is that the adoption of such a strategy not only has no exit plan for “when (and how) to apply the monetary brakes” (despite what Goldman claims), but it also commits the Fed to keeping nominal GDP on a projected growth path regardless of cost.

In a New York Times op-ed and again in an interview yesterday, Romer calls on the Fed to “try to do something bolder and more dramatic.” She advises that the Fed should “pledge to do whatever it takes to return nominal GDP to its pre-crisis trajectory.” (emphasis mine)

Romer says that the Fed communicating the adoption of nominal GDP targeting will alone improve confidence in consumers and raise expectations of future growth and inflation thus encouraging spending on things like cars, homes and business equipment. Of course, when that isn’t enough to juice the economy, the Fed should undertake further quantitative easing, promise and lengthen the period of zero-percent interest rates, and lower the exchange rate. (emphasis mine)

Now, let’s reiterate without the sugarcoating:

We [the Fed] should instill a fear into the American consumer that his/her dollar will be debased. Thus, he/she should immediately buy stuff before his/her purchasing power is inflated to zero. When the American consumer calls our bluff and refuses to purchase that which he/she does not need, we then print as much money as is necessary and buy whatever debt we can get our hands on, loan out money for free guaranteed ‘til eternity, and then manipulate our currency so the world over can afford all the things Americans are presently not producing.

In the interview, Romer states that the Fed should encourage inflation and commit to whatever is necessary to achieve rapid growth in the short-term, and then once the economy gets back on trend, “return to normal inflation and get back to the very steady, responsible policy as before.”

Two things:

1.)    How can the Fed responsibly contain inflation after trillions of dollars have been pumped into the money supply without affecting the artificial growth they’ve just created, if it’s created?

2.)    What is stopping banks and institutions receiving all that liquidity, from simply placing arbitrage bets (which have just been guaranteed) instead of creating loans and making investments like banks and institutions otherwise would be forced to do without Fed action?

Further, how can you possibly advocate pumping trillions of dollars into an economy when everyone knows that at some point that money will need to be either removed or monetized, and how can you possibly believe that this time around banks and institutions will act differently by lending and investing for a change instead of continuing to make money risk-free?

America needs to restructure away from a bloated banking and housing driven economy and into the next great engine for growth. Adopting the ludicrous ideas of Goldman Sachs and Christina Romer will do nothing but encourage money back into these same two sectors and produce inflationary pressures that will harm whatever growth occurs in others. It’s obvious why Goldman wants such a policy to be adopted: they’ll make a killing. But Romer, not being a bank, wants to do it because as an academic she wants to test her hypothesis on the only petri dish available to vain economists: the American economy.

From the interview:

“[The policy’s] real beauty is in the short and medium-run.  It would be a policy for the fed to say, boy, because of the recession… we’re going to commit to taking some very aggressive actions to get back to the path we were on before the crisis and to go through a period of very rapid growth.  Because, that’s what we need to put people back to work. But once you’re back on that path, now we’re back to a very reasonable, responsible, low-inflation, steady-growth kind of a framework.”

Again, there is no mention of what the transition from hyperinflationary policy, to steady and stable growth will entail. She merely states that it will occur. There’s no mention of the trillions of dollars it will require, no mention of the misdirection of resources, no mention of the damaging effects of rising prices, and certainly no mention of how much money banks stand to gain as a result. It also assumes that consumers and the market respond to the new policy without skepticism, having full faith in the credibility of the Fed, which at this point is lost.

Policy cannot be decided as the labor market, stock market, bond market, or any market dictates. The “real beauty” of monetary policy is one that doesn’t require experimentation subject to human fallibility.

James Groth is Research Associate


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