Thursday, February 12, 2015

Finance, Government, Monetarism: Some Assembly Required

...yet how to put it all together, given the fact these "pieces" scarcely coordinate at all in central banking settings? Even though these areas are vastly different, they remain the expected convergence for present day monetary policy. Truth be told, most among the public are more familiar with the ongoing gyrations of finance and government, than what is at stake in the monetary policies which affect their lives. As a result, market monetarism has more of an uphill climb for broad acceptance, than otherwise might be the case.

This issue has been on my mind since Richard Wagner and Vipin Veetil of George Mason University, dismissed NGDP targeting - basically on "general principle" - in a recent paper. In Bill Woolsey's response to their arguments, he noted that Richard Wagner was his finance professor decades earlier, which at least provides perspective for their rationale. Perhaps this also explains why Woolsey - as a "charter market monetarist member" - seemed nonplussed by their objections!

However, Wagner and Veetil's broad based attack on market monetarism, makes it difficult for some of us to counter their critique on specific terms. Indeed, it almost appears that their lack of confidence in market monetarism is due to a lack of confidence in the monetary role of central banking. For one thing: insisting that NGDP stabilization is a centralized dictate which does not consider microeconomic realities, misses the point. Of all the centralized activities a nation could assume, a nominal target is possibly the most benign of all. Unlike many centralized functions, this is one which seeks to represent all economic participants to the best degree possible.

Among other issues I already have with their assessment, recessions and depressions certainly do not cleanse, as Marcus Nunes also notes. Any lack of monetary stabilization only exacerbates already difficult circumstance in these cycles. In particular, monetary tightening which generates deflation is not helpful, as some Austrians assume. "Bad" deflation is not the result of normal price adjustments or productivity gain. Instead, shorting aggregate spending capacity means negative AD shocks which derail prior commitments on the part of numerous participants. The worst part about this situation is that resource potential is needlessly lost, and is not necessarily regained afterward.

In recent decades, financial and governmental interests have become more closely entwined. In the meantime, important monetary lessons from the Great Depression have been forgotten. One odd aspect of the financial perspective, is that it generates a political common ground among some who would otherwise be ideological opposites. Perhaps this alignment has bearing why the primary monetary interests of central banking appear as though lost in the shuffle. Who will tend to real monetary policy, if the Fed won't?

As Benjamin Cole indicated in a recent post, time aggregates also matter:
The unvarnished truth is that Americans are working the same amount of hours now as they did in 2009 - and also as in 1999.
Whereas the labor force since 1999 has grown by 13 percent. However, these facts are being missed as the media portrays a "back to normal" economy. What monetary printing has been possible, was often disparaged - not just by the right, but many on the left who remain disappointed that more hasn't gone to fiscal activity. Is it possible to return to a central bank which is willing to stress to the public, the primacy of the monetary role? In a sense, the only thing a monetary offset even asks for, is that after financial institutions and governments get their representation, the public gains permission for their monetary representation as well.

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