The new monetary policy

If David Uren is right about the new Governor of the Bank of England, Mark Carney, wanting to drop inflation targeting for nominal economic growth, the world will soon be returning to an era of high inflation and high unemployment. I think stagflation is on its way back.

I find it interesting that many so-called macroeconomists who considered that soft monetary policy from the Fed was a critical factor leading to the global financial crisis (ie: excessive liquidity driving up asset prices) now advocate even more liquidity and debt. Or that continuing to print money faster than the growth of the economy will not cause inflation to increase.

If unemployment is high, it cannot be reduced by inflation.

Personally I’m skeptical of Carney, and surprised by hagiographic reports greeting his appointment. To me he is like Joseph P. Kennedy – the fox put in charge of the hen-house, or the hunter turned game keeper.

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23 Responses to The new monetary policy

  1. tgs

    I don’t know. I’m not really across the theory of NGDP targeting but there are quite a few monetary economists who seem to think it’s a superior policy mechanism than inflation targeting.

    Scott Sumner is probably the leading guy in this area, or at least the most vocal.

  2. Alfonso

    Excellent, excellent…..the US is permanently QE 3ing or is it 3.5ing, the BoE are now public quasi quantitive easers and, most encouragingly, the new Jap PM curiosity is talking US style QE while Jap interest rates are zero and bridges to nowhere are legend.

    They want inflation but where the hell is it?
    Lift your game boyos.

    There are some things that theorists need to understand, in the real world of pragmatic trading bouts of asset price inflation racing with $ inflation is just the ducks nuts.

  3. ken n

    It’s hard to imagine any outcome except inflation to get rid of the debt. The incentive to do that is so strong.
    So, JC, where do we put out money?
    A 20 year horizon will see me out.

  4. Skuter

    David Glasner ( is another advocate of so-called market monetarism.

    Here is a good post on the real agenda…removal of central bank independence and financial repression in order to reduce government’s debt servicing costs.
    This may avoid a financial crisis but it has long-run consequences. Just ask the Chinese.

  5. Sleetmute

    Yeah, wow – yields on 10-year Gilts are up 20 bp since 1 October whereas 10-year Treasuries are up 16 bp. Obviously, the market is seeing a massive inflation risk from Carney’s appointment. The UK has serious, major supply-side problems, but easier monetary policy is needed to offset fiscal consolidation or else Britain will end up like the PIIGS.

  6. JC


    Sumner has turned me on this . NGDP targeting is the only way to go.

    It’s wrong to think that low interest rates suggest loose monetary policy. In fact low bond rates and low over night rates are a sign of tightness, not lossness as sumner explains.

    Just as CBs can impact the economy by dropping it into recession, the cam also raise AG through adequate monetary policy.

    Targeting NGDP at 5% is the way to go.


    If the cliff crap is solved stocks will do great in the US and Europe.

    In fact I have my ears pinned back having bought a load of US large cap bank stocks.

    Think about it, the US will QE 1 trillion dollars until the unemployment rate is 6.5%. The Japanese election was won by the LDP which ran on a platform of raising NGDP and the euros are easing much more in 13.

    It will be a great year for stocks as I think the cliff bullshit will be resolved.

  7. Skuter

    Sleet, yields are being driven down deliberately by the BoE. I would be wary of using bond yields as an indicator of market expectations of inflation at a time when the existing monetary policy regime is changing. The major player in the market (that just so happens to have the power to create money out of thin air) is actively trying to engineer inflation.

  8. Skuter

    It will be a great year for stocks…

    That is pretty much given JC.

  9. Sleetmute

    As JC notes, low yields are a sign monetary policy has been too tight, not too loose. That’s what Milton Friedman said anyway. To the extent QE has been unanticipated, it has increased yields rather than reduced them. Why? Because it reflects market expectations of higher nominal GDP.

  10. Skuter

    Sleet, maybe in ‘normal times’. But long term yields are low because central banks are ‘twisting’ in a deliberate effort to drive down those yields. They are trying to reduce the returns on savings to induce spending. In other words, financial repression.

  11. JC

    As JC notes, low yields are a sign monetary policy has been too tight, not too loose. That’s what Milton Friedman said anyway

    sactly…. Milt made that comment. I sort of understood it in the same way that a dog knows food, but doesn’t know or care where it came from. And then I read sumner saying that milt said the same thing and going to the trouble of explaining it.

    The most important element of NGDP targeting is that it’s abut signaling. The CB gains cred and little will need to be done in order to move markets toward a desired direction.

    That is pretty much given JC.

    Except Aussie stocks though as I think the Aussie goes to new highs.

    All the fucking planets are aligned for stocks t go higher.

    Guys, listen tothe cnbc David Tepper interview. He stole my thunder. Great interview this week.

  12. 2dogs

    “If unemployment is high, it cannot be reduced by inflation.”

    Soft monetary policy can be effective in reducing unemployment if the currency falls, reducing domestic wages in FOREX terms. This would also imply inflation.

    It tends to be ineffective if combined with a fiscal deficit, which pushes the currency up. This is why QE3 et al has had lacklustre results.

  13. m0nty

    I think stagflation is on its way back.

    Yeah Samuel, Sinc tried that one six months ago. Made him look a bit silly.

  14. Jc?

    Shut up fat boy

    This is an economics thread

    You have no business showing your face here, fatty

  15. Jc?


    The nominal rate doesn’t have to fall. The real rate does though

  16. wreckage

    Yeah I was given to understand that inflation could be used to reduce real wages, thus acting a bit like a reduction in minimum wages….

  17. .

    I still can’t see why you can’t use multiple targets – Taylor Rule, anyone?

    Yes, target NGDP but target it in the context of having 0% inflation in the medium to long run and flexible short term inflation of -2 to +2%.

    The monetary base should in the long run expand in proportion to nominal GDP (and be implicitly targeted). The CAD would look after itself and be representative of differences in the real economy and industrial development.

    I’d also accumulate gold proportionally as currency was expanded.

  18. Pedro

    NGDP targetting is not some stupid philips curve theory. The point is to prevent falls in NGDP, which have real effects. Contrary to the orthodoxy, money has not been loose. NGDP targetting is a get-out-of-the-way strategy.

    If you read Sumner you will see that he thinks the base does not have to be debauched to hit the target and that he is also a supply-sider.

  19. Skuter

    I understand the reduction in real wages that monetary expansion can bring about, but isn’t a key part of this debate whether Cantillon effects exist and how big they are? It is fundamental as to whether the Miseans/Hayekians (Austrians) or the Sumnerians/Hawtreyans (market monetarists) are correct. If the Austrians are correct, then we risk exacerbating supply side problems by using monetary expansion as a stabilisation tool.

    I tend to think that Cantillon effects are there. Chinese investment bubbles are proof of that. To what extent I am unsure, but at the very least, their existence makes NGDP targeting problematic.

  20. .

    Contrary to the orthodoxy, money has not been loose. NGDP targetting is a get-out-of-the-way strategy.

    Here’s the thing. It’s been tight then you get a shock of very loose money intermittently.

    NGDP is reasonable in that it partly recognises the non-neutrality of money.

  21. Put this in the wrong thread:
    JC, I see a mob of politicians and Bankers playing around with the rules like a kid with a box of matches, and I get as nervous as shit.
    So I continue to liquidate assets/buy more gold or silver. It’s not much of a plan, but it’s better than anything else I’ve got.

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