Thursday, September 10, 2015

Thoughts on Monetary Policy and the Real Economy

Monetary policy - especially in times of low growth - can be too easily confused with both supply side and financial considerations. If that were not problematic enough, central bankers are presently allowing cutbacks in credit formation to detract from growth capacity in commerce as a whole.

As a result, the importance of monetary policy is often downplayed, when real economy and finance issues are inexplicably discussed time and the wrong arena. It's as if there weren't enough "reasons" already, for central bankers to neglect adequate monetary representation. In a recent post regarding Australia's central bank, Scott Sumner offers an argument for NGDP - one which particularly applies in a time frame when central bankers find too many reasons to short aggregate spending capacity.
Let's clear up some misconceptions. Monetary policy is a panacea for stable NGDP growth. And you need stable NGDP growth (or nominal total comp.) regardless of what else is happening in the economy. Monetary policy does not boost the economy by encouraging lending, it boosts the economy by encouraging more NGDP. Higher lending is a side effect.  
If there is excessive lending (due to moral hazard, tax breaks or debt, etc.) you still do whatever it takes to keep NGDP on target, but you also have tighter regulation of lending, so that more of the NGDP growth is non-credit oriented growth (like restaurant meals) and less is credit oriented growth (like housing). 
Monetary policy is not a panacea for a lack of RGDP growth. Indeed the central bank should ignore RGDP. Instead, policymakers should try to boost RGDP growth with supply side reforms.
Why do central bankers get bogged down with financial concerns and the activities of the real economy? By doing so, they make economic conditions more fragile than would otherwise be the case, especially during negative supply shocks. Struggles between a credit centric view, versus sufficient monetary representation of the real economy, hide another important issue. What is the problem with the real economy, in terms of present day growth? And why aren't there ways to discuss this pressing concern in public, which need not derail what the Fed should concentrate on in terms of monetary policy? 

One problem is that supply side reform is more focused on ways to gain government assistance, than on generating a stronger framework for commerce, overall. If representatives of the real economy could work together to find ways to move ahead, political frameworks might serve a much more useful purpose than is presently the case. Right now, taxpayers are sacrificing a major part of their time and resources for what has become essentially a circus - both in Washington and on the campaign trail. Non tradable sectors in the U.S. scarcely even make a attempt to function as free markets. Where does one even begin?

Marcus Nunes has a message for the FOMC in the form of a Joe Jackson song, "You Can't Get What You Want (Till You Know What You Want)". While it certainly applies to central bankers, I suggest this is a broader problem as well, for the governments which appear to be clueless as to the growth and prosperity their citizens still seek.

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