Saving the Economy: NGDP Targeting for the People

This article was first published by me on Talkmarkets:

Nominal GDP Targeting, or NGDPT, is the cornerstone economic doctrine of the school of economics called Market Monetarism. NGDPT is the solution for the Fed who was watching inflation in 2008 when the Great Recession creeped up on them unannounced.

Those watching NGDP, like Scott Sumner and his friends, understood that the economy was in trouble. The Fed had no clue because it was tracking inflation which had not declined while nominal GDP was in steep decline.

So, after the crash, the Fed indeed began to buy assets, through QE, as a means of bringing up asset values. And yet, inflation has still trended below the 2 percent target. So, the Fed has inflated assets, while wages and inflation overall have stagnated.

While this asset purchasing is not in and of itself NGDPT, it is approved of by Market Monetarist Scott Sumner, who recommended extending QE. But prolonged QE has resulted in weakness on main street, and an asset inflation that may put markets like real estate and stocks into serious bubble territory.

NGDPT can be established by watching total spending and money supply rather than by watching inflation. Yet what has happened with asset purchasing is that wealth has shifted to the top, and demand on main street is weak deep into this business cycle. Without auto sales, and credit for autos, the consumer economy remains dismal:

So, the only way to fairly distribute the proceeds from NGDPT is to establish an NGDP Targeting for the people. This would be accomplished by a form of helicopter money. David Beckworth, also a market monetarist, has advocated that in times of economic weakness, the Treasury issues bonds to the Fed in exchange for base money that would be deposited directly into the accounts of Americans.

Now this is not the classic helicopter money advocated by Eric Lonergan. He would not use bonds, but actually use pure fiat money not backed by bonds. But in that case, it would have to be rare and unexpected, so that inflation expectations would be nipped in the bud. A one time gift of base money does not carry with it expectations of inflation unless it were abused.

No, the helicopter money advocated by Beckworth would be based on treasury bonds in exchange. That would be a sterilized action, not inflation causing. Once the target of money in supply was met, the injections into the accounts of Americans would cease until the next downturn. Even the Brits like Beckworth's proposals:

As noted above, the framework we are working with is similar to models outlined in Turner and Woodford (2013), Beckworth (2013), Woodford (2012) and Avent (2013) – ours is most conceptually similar to Beckworth’s; though it is still conceptually slightly different to all of the above. 

A third form of helicopter money calls for the Treasury to sell bonds to the public and then transfer the proceeds to everyone's account individually. That would not be base money from the Fed. It would be proceeds from bonds sold. But that program would depend upon the bonds sold.

The Trump tax plan may incorporate a similar fiscal, not monetary, stimulus, raising the standard deduction for main street families until later when the economy presumably would be stronger. That seems like a brilliant plan until we see that the shrinking of Social Security as an offset robs main street with the other hand. And no, it is not that hand of self interest. It is the hand of greed. And it is also going to increase the deficit. That could have benefits, in the production of more treasury bonds, as long as it doesn't get out of control.

And, that concept is only temporary tax reduction, unless you are already swimming in money. So, once people find out their taxes will go up they may choose not to spend. And for many, this tax reduction will be offset by limitations on housing deductions. This is a direct attack on blue state middle class folks, who fund the red states. What is POTUS thinking?

It is clear that Lonergan's helicopter money is the safest and simplest manifestation of the idea. And watching NGDP should be a mandatory activity of the Fed. Lonergan's plan could be the least hurtful to the government, with only the Fed's balance sheet increasing instead of the government deficit, but with no added bonds. Bond shortages in collateral activity are an issue.

Of course, the Fed has been slow as a snail in reducing that balance sheet. What are they thinking? They need to get ready for a rainy day. We may need a helicopter drop next time. And no, it will not be clawed back by taxes later on. It is base money!

Jeffrey Snider says nothing is as it appears. Long bond investors don't fear inflation, full employment or anything else that the Fed throws at the problem:

Forget that falling yields have been consistent with actual economic growth, the absence of it, this time Economists have got it right? What changed? Central bankers started out downplaying any economic risks, and then the Great “Recession” happened; after it, they played up the recovery story at every opportunity, and it never came. Now they are, out of nowhere, economic experts despite being utterly wrong from Day 1? That’s a lot of days (3,770 since August 9, 2007) to just set aside in order to start believing this time, this time, they have to be right.
He has come to the conclusion that there is not a business cycle in the classic sense. No big bust on the horizon because no boom now. Just a slow decline of middle America is our fate, if I read him correctly.

We have extended below trend growth, if you could call it that, mostly from credit for car buying. One could say we are like Japan. Almost 4 thousand days of meager growth. Nations start electing weirdos to lead them when that happens. Political instability is always a threat when populist anger takes hold.

If the bond market is right, we need a lot more stimulus for main street and we need more bonds. The Trump administration wants a little more stimulus, likely not enough, but also will produce more bonds with the deficit.

That will likely not be enough. We don't need easy money mortgages, or the Fed buying mortgage bonds. We need money put directly into the hands of the people to spend. There is no other reasonable solution. Consumer spending is what is at stake here, since that is so crucial to the functioning of our economy.

We face the threat of an expanded Fed balance sheet, zero lower bound in the next downturn, and the inequality of wealth, seemingly ever increasing.

Therefore, some sort of Helicopter Money will simply have to be considered as a means to evening out the money supply over time.


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