One of the most aggravating defenses of the current monetary policy insanity is that we “can’t let the inflation genie out of the bottle.” Or the argument that “the 1970s shows it’s easy to let inflation get out of control, but hard to get it back under control.” What a bunch of nonsense!
I just checked on St Louis Fred, and the Fed cut rates no less than 19 times between 1967 and 1980, which is the core of the Great Inflation. Not a single one of those rates cuts was justified, not even close. The Fed knew very well that NGDP growth was running about 8% in the late 1960s, which is way too high, and closer to 11% in the 1971 to 1981 period, which is completely insane. And despite those outrageous rates of NGDP growth, it cut rates again and again and again and again and again. Nineteen times. You think that was some sort of mistake? Seriously? What sort of inflation would you expect with 11% NGDP growth?
And don’t tell me that some academic showed that the rate cuts were justified according to some model due to data lags. If that’s what the model says, then the model is worthless. I was there, there was nothing “accidental” about the Great Inflation.
I understand why younger bloggers like Matt Yglesias lash out at the conservatism of central bankers. But the sort of people who run the Fed today are no different from those who engineered the Great Inflation. Back in the late 1960 and 1970s they were doing exactly what the consensus of economists wanted done. The problem was the consensus was misguided (“Money is too easy? What do you mean? Rates are high. In any case, unions are causing the inflation.”) And the Fed today is doing exactly what the consensus of economists wants them to do (“Tight money? What are you talking about? Rates are ultra low. In any case deleveraging is causing the slow growth.”)
One thing I like about the younger generation is that they see right through phony self-serving justifications for failure. My daughter sees me as I am, not as I wish I were. She sees when I’m being a self-serving phony. Evan Soltas found this old Keynes quotation from 1932:
“In the United States it is almost inconceivable what rubbish a public man has to utter to-day if he is to keep respectable. Serious and sensible bankers, who as men of common sense are trying to do what they can to stem the tide of liquidation and to stimulate the forces of expansion, have to go about assuring the world of their conviction that there is no serious risk of inflation, when what they really mean is that they cannot yet see good enough grounds for daring to hope for it.”
. . .
The extent to which this quote feels contemporary both amazes and disturbs me.
Younger people who are paying attention recognize the insanity of what’s going on right now. Yichuan Wang, another high school blogger is also producing great stuff:
These notes about interest rates really only work in a futures targeting regime, in which we are allowed volatility in interest rates so they can show market expectations. This is just another reason why interest rate targeting is not optimal; it suppresses a key source of information for both public and private agents. High interest rates won’t be confused for “tight money” if the interest rate is determined by the market.
This post should remind us that Market Monetarism is a world of non-linear causality and counter-intuitive movements in both expectations and interest rates. Except they wouldn’t be counter-intuitive and these arguments would be self evident if policy actually targeted the level of nominal GDP. Alas, the Fed does not. A great shame, for both our learning of intuition and suffering in this nation.
I’m greatly heartened by the fact that the smartest high school bloggers seem sympathetic to market monetarist ideas. The next generation will do fine; it’s my fellow baby boomers that worry me.
PS. I’m beginning to think I made a mistake converting to Apple. I don’t doubt the product is fine, but I’m not good at learning new languages. I’ve found myself “petting” my mouse at work (where I still have a PC) foolishly expecting it to scroll. At an age where I’m losing several IQ points a decade, can I really afford to devote so many brain neurons to knowing two different computer languages? I’ll continue to read all the comments, but won’t have time to answer them all.