E Attacking The Everything Bubble Without Killing The Economy


We think the (NGDPT) rage will be short-lived. The reason is that NGDP targeting’s newest supporters are bad-weather fans. That is, they like it now, when NGDP is well below its 2007 “trend” line, meaning that the policy implies extended and more aggressive monetary loosening. But what happens when NGDP goes above its target, as it eventually will? NGDP targeting then requires tightening, even if inflation is low – it may even require a deliberately deflationary policy stance.

Well, it isn't short lived if Yellen recently said this:


Elaborating on how the central bank should think about what to do if rates have to be cut to zero again in the future and can’t go any lower, she said the Fed should promise now that it will keep rates low enough to let a hot economy make up for lost time.

Whether you like the idea of NGDP Targeting or not, a symmetrical approach to monetary policy seems more fair. But the Fed is procyclical, reining in bank lending if there is a whiff of adversity, and is assymetrical as I have said, always pushing wages down, opting for recession over inflation. 

Now the Fed is in the process of popping the bubbles all at once. Dire consequences for workers will follow. It could be deflationary in the way that Mish Shedlock rightly abhors. This, according to Mish, is where we are at now:

  • What's left on the inflation side is mostly what's happening right now: Late stage inflation.
  • What's left on the deflation side is mostly long-term secular deflationary forces.
  • Asset bubble burstings are deflationary by definition.

We face a grim future unless economist Palley's ideas are seriously contemplated and applied. Real estate could be popped while stocks and wages and rates for businesses could remain stable. At that point, dealing with the stock markets of the world could become center stage, but not while the world economy and the American worker are suffering. Anything is better than the heavy Fed hand pummeling all markets at once. That will result in world economic slowdowns that could result in unnecessary suffering.

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Disclosure: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment ...

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Bill Johnson 1 year ago Member's comment

Good read, thanks. But I'm curious to know if Mish Shedlock has a rebuttal for your respectful criticisms of his work.

Gary Anderson 1 year ago Author's comment

I am not really critical of Mish. He gets the difficulty of asset inflation on main Street, Bill. It is just that popping everything has unacceptable risks worldwide. I do not know his views about Palley. Thanks for the comment.

Beating Buffett 1 year ago Member's comment

Fascinating... thanks for sharing.