MM Boys and Tight Money. Market Monetarist Terms Listed for You

 This article was first published by me on Talkmarkets:

The New MM Boys are attempting to aim for the fences, and develop a new economic school of thought that will cause the economy to prosper through stabilizaton of Nominal GDP. But so far they are just hitting singles and doubles. Before I continue, here are a list of terms that apply to the New MM bloggers:

Terms Market Monetarists are most interested in. Google them if you are not familiar with them:

Phillips Curve broken down
Nominal GDP (NGDP)
NGDP Targeting and Inflation Targeting
Money Illusion
Rational Expectations
NGDP Futures
Nominal Income Target
Monetary Disequilibrium Theory
Sticky Wages/Sticky Prices
Hot Potato Effect
Wicksellian Dilemma
Wicksellian Natural Rate of Interest
Keynesian Liquidity Trap
Interest on Reserves (IOR)
Aggregate Demand Determined by Future Path of NGDP
Base Money
Excess Reserve Interest As a Monetary Tool
Velocity of Money
Decline of M1 Money Multiplier
PT or PY?

Turns out, the demand for bonds I have written about here at Talkmarkets could be preventing GDP targeting as the Fed only seems to want to buy bonds or MBSs and can't hoard long bonds forever, which are in great demand. The Fed doesn't seem to want to buy shopping centers (although it was stuck with one), or,  gold or stocks or other assets like land to use as collateral, at this point. Some market monetarists want the Fed to branch out for collateral.

One problem is that market monetarists expect bond yields to rise when the Fed purchases those assets. But that may not be proven true.

Now, when I was a young child, around 12 years old, my father took me to watch the original MM Boys from the New York Yankees. It was at the old Wrigley Field in Los Angeles, first home of the California Angels baseball team.

Wrigley Field had a ramp where players walked to the field. I managed to see the real MM Boys up close, a childhood dream. There stood Mickey Mantle and Roger Maris, and I got Mickey Mantle's autograph that day. Maris watched, smoking a cigarette. Can you imagine if those guys had taken care of themselves?

That year Maris would hit 61 home runs, and Mantle 55 home runs, steroid free. I was also a fan of the great Willie Mays.

The New MM Boys, the Market Monetarists, have not hit any home runs. Scott Sumner hit a double, likely influencing the Federal Reserve to extend QE although it isn't his favorite vehicle for targeting.  But that QE drug has now turned banks into QE addicts. So he hit a double, in getting a little growth and stability in the economy, but then the bankers' addiction left Sumner stuck on second base. The banks fear lending and would rather suck at the teat of Interest on Reserves (IOR).

But you have to know that I had great hopes for the New MM Boys. They have a similar view to mine, that negative interest rates, secular stagnation and a cashless society are all bad things. They see the direction Europe is going and fear the world will adopt that plan. They are right that the Fed was too tight during the credit crisis, probably making things worse for the economy.

So, while I commend them on their intentions to prevent busts and rekindle prosperity, they face resistance for their solutions to prevent the slide past the zero bound. The don't want Negative Interest Rates, or NIRP (coined by Kevin Dowd I think), but they have unusual solutions to the problem of negative rates.

My concern is that the Fed buying up other assets would not necessarily boost wages but rather only boost speculation in those assets by the private sector. Some people think that the market monetarists are just banker shills.

But I believe they are more substance than that. For example, they deny the Keynesian argument of liquidity trap. They believe that money printing can increase interest rates. Again, I would caution that demand for bonds as collateral can interfere with that. But historically, that has been true.

Don't be fooled, the MM Boys know an increase in new money will devalue money. A tool for devaluation is printing money. American's need a little purchasing power, though, don't they? Austrians watch the MM Boys in horror, not even wanting a central bank, while other economic schools are skeptical as well.

One complex solution is that Scott Sumner advocates negative interest rates on IOR. But he does not advocate negative nominal interest rates in the economy.  I can't see where he would accept negative interest rates in the economy although you have to realize, economists can change their minds. Look at Krugman, who was classical and became Keynesian.

And Bill Woolsey, a market monetarist, sees nothing wrong with banks passing a negative IOR onto customers of the bank. That seems to contradict other market monetarists and sort of defeats the purpose of the New MM Boys altogether. But all Market Monetarists don't think alike on everything.

But for now, it appears most of the New MM Boys want stimulus to put us above the zero lower bound. Interest rates have not fallen to lows we see now for 5000 years, so the New MM Boys wonder why now. We have negative real rates and are headed to negative nominal rates if other economists have their way.

So, Market Monetarists seem to want much higher targets for pricing of commodities and things produced through seeking from the Fed a commitment to maintain or restore wages. But central bankers tend to shy away because the measurements for GDP can be revised, meaning they can be in error when first measured.

Certainly if central banks do decide to buy a lot of different assets, as the MM Boys want, they will set prices for those assets and we know they have secretly mispriced risk in the past to do so. Now at least, price fixing by the Fed would be out in the open.

Market Monetarists say that economic shocks are handled in more stable fashion if NGDP is targeted. They say that if money is too tight it will show in the falling of NGDP.

Lars Christensen, whose pdf link is provided at the end of this article has said that if money is loose, long bond yields should rise. But that was then and this is now and I would caution about this not happening due to the fact that long bonds are in massive demand for collateral. I don't think that the market monetarists have factored Fed market manipulation into their observations.

But I am still rooting for them to figure something out, because it seems like interest rates floating at a more positive level have been a normal occurrence in the course of human history. Civilizations didn't worry about negative rates. Derivatives and collateral may well one day be the destruction of historical economic thought, taking down the Classicals, Keynesians, Austrians and Market Monetarists!

Still, I hold out hope for some solution that would return us to the old economics. Banning derivatives may be the only, ultimate, answer. Certainly, the MM Boys, must try to convey their understanding of their positions to the rest of us. Some sincerely do, and some could care less about anyone not in the profession. The Fed may be powerless to stop a credit crisis, or maybe the MM Boys are right, that it is all about base money and velocity of money.

If they can prove they can overcome the new normal of low interest rates, they will illustrate genius. We can only hope.

For further study, see Lars Christensen's working paper, the "Bible" of the New MM Boys:
Market Monetarism

See also:

See also:
Could the Fed Have Prevented the Financial Crisis?

See also:

The Fed Knew LIBOR Was Exploding in 2007 and Did Nothing


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