James Hamilton replies to Scott Sumner

Over at CatoUnbound:

Let me mention one other real-world complication that has made it difficult for the Fed to achieve a faster growth of nominal GDP. Macroeconomists often like to think of inflation in terms of an aggregate price index, the variable P in the equation of exchange. But, particularly in the current environment, aggressive stimulus by the Fed is unlikely to show up as higher wages or the prices of most services, but instead would raise relative commodity prices and could in a worst case scenario precipitate a currency crisis, both of which would be highly destabilizing in their own right. I agree with Sumner that the Fed could and should have done more, but would caution that it is also possible for the Fed to try to do too much. I come back to the perspective with which I opened – given the earlier regulatory lapses, significant economic losses could not have been prevented by any monetary policy that could have been implemented in the fall of 2008.

There are many more points of interest in this dialogue and further comments to come.


Rising commodity prices? Sounds like 2003-2008!

Artificially low interest rates also increase the supply of available dollars on the world market but don't affect pay very quickly. So, the price of dollars drops. This drop in the price of dollars LOOKS like commodities are all increasing in price, but really its the currency that decreasing. When most countries in the world are all trying to do the same thing, and many are directly pegging to the dollar, you end up with very high commodity prices and very little increase in wages (outside of a few fields, iron miners in Aus, for example had MUCH higher wages, but that is not the norm.)

Fed debit cards.

I keep seeing economics articles and blog posts that insist that we’re NOT in a liquidity trap (and, of course, that yours truly is all wrong) because the situation doesn’t meet the author’s definition of such a trap. E.g., the interest rates at which businesses can borrow aren’t zero; or there are still things the Fed could do, like buying long-term bonds or corporate debt, or something. there are other things the Fed could do — and it’s doing them, on an awesome scale. But they’re controversial, precisely because, unlike conventional monetary policy, they involve picking and choosing among potentially risky investments. And there’s a much stronger case for fiscal policy than in normal times, because we don’t know how well these unconventional measures will work.

I second Philo. The only interesting point is that he understands that he does not understand Sumner's proposal. Most others don't event get that far. It's unfortunate that Robin Hanson does not do macro.

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