NGDP Targeting Good Observation Tool, Gold and Speculation

This article was first published by me on Talkmarkets:

Is targeting Nominal GDP (NGDP), which is promoted by market monetarists, a fair way to expand the money supply and level out the business cycle? I have already admitted that watching the path of NGDP is a great tool and leading indicator signaling boom or bust. The concept of NGDP futures is interesting, but fraught with danger. 

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Image taken by Clark Anderson/Aquaimages

I am mostly concerned with fairness, regarding NGDP Targeting. I asked this question on a couple of econoblogs:

...Oh, by the way, the big banks did a form of NGDP targeting in rich neighborhoods. They permitted those that defaulted to live there free, so the prices would not crash in those neighborhoods. So, even in crash cities like Reno and Las Vegas, there were people living over 5 years in houses where the mortgage was not being paid.
Of course, the average Joe was not afforded such a break. The banks didn’t care that the prices dropped in his neighborhood because they had big clients ready with credit lines to go in and pay cash at rock bottom prices on thousands of homes. So, they got the houses they wanted back through foreclosure and credit to their wealthy clients.
So, the question is, based on what the big banks did in the above statement, can NGDP targeting possibly be fair?
Looking at the example in the quote above, the banks did not really increase the money supply. It was not actual NGDP targeting. Letting people stay in the houses without paying made it look like the money supply was stable, and that prices were stable.

But this question is important in the light of our failure to establish a rise in interest rates throughout the world. NGDP targeting would most likely be better than the negative rates and cashless society that Sweden is facing. But otherwise, it could cause big problems.

I had one answer granted to me by the NGDP pros, as to fairness, that those working for higher, sticky wages could be hurt, but that the negative effects of NGDP Targeting are unknown. I don't know if that is a definitive answer. But unknown is just what Wall Street needs, right? Not!

Scott Sumner did not go into detail, but he said, concerning the fairness of NGDP Targeting: "Chris, No, it’s not fair..."

What does NGDP Targeting hope to achieve? It hopes to level out the cycles of boom and bust. It hopes to slow a deepening of recessions while jump starting economies hurt by deep recessions quicker. It hopes to head off recessions using NGDP as a leading indicator.

But, clearly, NGDP Targeting will feature asset purchases and a futures market. The BOJ purchases REITS. So, some assets may benefit while others won't. There could be an inherent unfairness to that process.

The Fed would target NGDP at a certain level. The Fed would then raise or lower inflation to level out nominal GDP, which is real growth plus inflation. Personally, I think the Market Monetarists are deceived into thinking that the Fed would do the right thing, limit booms and busts, and the world would live happily ever after.

From Wikipedia, we see that:

Market monetarists contend that by not paying attention to nominal income, the Federal Reserve has actually destabilized the US economy; nominal GDP fell 11% below trend during the 2008 recession, and has remained there since.

But if the Fed has a secret agenda these market monetarists will be disappointed. The Fed will want to wash out weak hands (debt laden business and high wage workers), and may want to give friends a head start toward prosperity in the recovery. The Fed feels a need, in other words, from time to time, to blow bubbles and create busts.

NGDP Targeting would interfere with these secret Fed agendas. NGDP could end up being manipulated by the dreadful need to blow bubbles and create busts.

Scott Sumner wants an NGDP futures market, which supposedly would be a free market indicator of NGDP. But we know how markets are manipulated. Why wouldn't an NGDP market be manipulated by big players if the cocoa market could be cornered by one man?

This from the above Wikipedia link is the goal of the futures market:
The (central) bank would offer to buy and sell NGDP futures contracts at a price that would change at the same rate as the NGDP target.
How subject to manipulation would those contracts be, even if the Fed did adopt the policy of implementing the futures market? The NGDP Futures market lives in the head of Scott Sumner at this point, and it is unclear if it could be manipulated.
So, ultimately, NGDP Targeting would not help gold, which thrives on boom and bust but could be subject to being cornered as well. Of course, NGDP Targeting could help gold if the central banks push it up as an asset. That seems low on the priority, compared to REITS and practical commodities.

So, it appears that NGDP Targeting would be neutral regarding gold,unless the financial community lost faith in the ability of the market monetarists to get the targeting right. And that is a complex process that is more difficult to implement than inflation targeting, which is what the Fed does now, of course.

Perhaps another effort besides NGDP Targeting, the effort to get the Fed to fund projects, will actually create more business in America. There are two views regarding this funding, which showed up in the highway bill. Ellen Brown gave that funding for roads, a favorable report, saying that Fed involvement would expand the economy, but that more needs to be done. And Jeffrey Rogers Hummel has said that congress is robbing the Fed.

Hummel also says that the Fed will get the money back and it was just a way for Republicans to fund something without raising taxes. But even if this is true, at least the Fed is in the business of infrastructure repair. It can't hurt the economy. Good infrastructure increases the efficiency of the economy.

The Fed would not directly increase the money supply by funding roads, but economic activity would increase, and that could expand the money supply, as road workers get loans for houses and cars.

Perhaps more of this stimulation will be coming in the future from some plan instituted by the Fed. Certainly we should throw the book at the liquidity trap, and not give up like the New Keynesians, as they have practically bowed down to the inevitability of negative interest rates and even cashless societies.

The NK's have given up on Europe. And they want to lower interest rates this very minute in the USA, so Wall Street can continue feeding the stock market.

Some think NGDP Targeting could already be here as it has been added to the Fed tools. It has possibly proven itself to be inherently unfair, as QE was extended time and again since 2009. It did increase the wealth divide, but there was a little trickle down in low paying job creation.

Perhaps, buying gold or other commodities would have been far better than buying bonds, which created a shortage of long bonds in the derivatives world. But that would have been unfair as well.

We should follow Sumner's progress on the futures market implementation to see if it could improve the overall economy.


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