Dear God.

“it’s impossible to create growth through inflation in the long run.”

yes, you may have noticed we are in a recession with a few millions unemployed people who might like jobs before they die.

Are you talking about NGDP targeting? If so, that’s perfectly well defined quantity, so what’s all this wibble about lack of accountability?

The passage about inflation “wiping out” growth is pure nonsense.

Take a look at a graph of UK inflation over the last few decades. Why are you worried about inflation now?

You know who else craps on about the supposed inflationary consequences of loose monetary policy? Paul Ryan and the Tea Party.

OK, the Heath government did slash interest rates in the early 1970s to avert an expected recession in the British economy but that conicided with a peak in world commodity prices – try this analysis from the Brookings Institution:

” AN EXTRAORDINARY increase in commodity prices occurred in 1973-74. Even leaving aside crude oil as a special case, primary commodity prices on one index more than doubled between mid-1972 and mid-1974, while the prices of some individual commodities, such as sugar and urea (nitroge-nous fertilizer), rose more than five times .”
http://www.brookings.edu/about/projects/bpea/editions/~/media/Projects/BPEA/1975%203/1975c_bpea_cooper_lawrence_bosworth_houthakker.PDF

Softer monetary policy in Britain to promote growth needn’t boost inflation downstream. It crucially depends on whether economic growth is currently demand or supply constrained. But some believe that one unwelcome consequence of the continued flagging of the economy has been to take some supply capacity out of the equation.

If newly created money gets spent on creating new productive capacity then the extra demand is matched by extra supply. For example, there seems to be a wide consensus that we have a shortage of affordable and social housing alongside a deep recession in the construction industry. But I freely admit that is a very keynesian way of looking at the situation we are in.

You appear to have picked up every cliche from what passes for the mainstream media and thrown them all together. Terms such as “debasing” the currency may sound technical but are just meaningless waffle. There is no such thing as debasing the currency. Lots of things affect nominal exchange rates trade flows, growth rate differentials, interest rate differentials, inflation rate differentials. As any fule would know it is almost impossible to separate any one variable from another, they are all connected. That is why predicting currencies is so difficult because the variable dominating will determine the movement in the nominal exchange rate vis-a-vis every other currency. However, an inflation rate differential over time will imply a depreciation of the nominal exchange rate vis-a-vis every other currency with a lower inflation rate.

Real prices adjust to nominal changes with a lag is hardly a revelation. It is the Balassa–Samuelson effect.
http://en.wikipedia.org/wiki/Balassa%E2%80%93Samuelson_effect

Money is non-neutral in the short-term but neutral in the long-term. A country can’t gain a permanent trading advantage from an undervalued currency because the real effective exchange rate adjusts to the higher inflation rate from the undervalued currency. However, the BoE nor Carney are targeting the exchange rate so it is all beside the point. Listening to the media one could be mistaken for believing we had an undervalued exchange rate because there was a big depreciation from peaks, in 2008. We do not, the sterling exchange rate is still overvalued.

Some people would prefer us not to have a central bank and that would imply they favour a free banking system. Effectively, the banking system would determine monetary policy. However, that is not the system we have. Therefore, the central bank needs to have a target, a policy anchor remit. The CPI targeting remit is not working and needs to be changed. Mr Osborne has many flaws but obtaining the services of Carney is not one of them.

With the retirement of the current clown changing the remit for an incoming governor to one of targeting the level of NGDP would be the best thing Mr Osborne could do. The usual Keynesian objections that the central bank does not have up to date data on NGDP, and the growth rate is subject to revision does not apply if the target is the level rather than the growth rate. Such a system would be far better for workers and businesses than the current remit, something that TUC economists have acknowledged. Your assumption that it would result in higher inflation implies that you believe the UK economy is riddled with supply-side rigidities. That is something that a Conservative may say but it is a strange argument from a lefty i.e. not much of an output gap.

“If everyone else around the world started trying to do the same trick, then chaos could potentially follow. If we try to outdo the Japanese, who try to outdo the Chinese, who try to outdo the Americans, who try to outdo us, then we’re engaged in a currency war. ”

You do realise that is utter crap? If everyone tried to depreciate their currency vis-a-vis each other the result would be all their NGDP would expand, that is called a result, not chaos. The so-called “currency war” scaremongering is depressing drivel, the eurozone especially need to engage in a bit of currency war. Here is the great and under appreciated UK Treasury economist, Ralph Hawtrey, from the 1930s to slay the currency war trope. Now we no longer have currencies priced in gold but the mechanism whereby unbalanced economies can obtain adjustment through the exchange rate is still the same. Moreover, it is still “an entirely imaginary danger”. Output and jobs is what matters, not exchange rates.

“In consequence of the competitive advantage gained by a country’s manufacturers from a depreciation of its currency, any such depreciation is only too likely to meet with recriminations and even retaliation from its competitors. . . . Fears are even expressed that if one country starts depreciation, and others follow suit, there may result “a competitive depreciation” to which no end can be seen.

This competitive depreciation is an entirely imaginary danger. The benefit that a country derives from the depreciation of its currency is in the rise of its price level relative to its wage level, and does not depend on its competitive advantage. If other countries depreciate their currencies, its competitive advantage is destroyed, but the advantage of the price level remains both to it and to them. They in turn may carry the depreciation further, and gain a competitive advantage. But this race in depreciation reaches a natural limit when the fall in wages and in the prices of manufactured goods in terms of gold has gone so far in all the countries concerned as to regain the normal relation with the prices of primary products. When that occurs, the depression is over, and industry is everywhere remunerative and fully employed. Any countries that lag behind in the race will suffer from unemployment in their manufacturing industry. But the remedy lies in their own hands; all they have to do is to depreciate their currencies to the extent necessary to make the price level remunerative to their industry. Their tardiness does not benefit their competitors, once these latter are employed up to capacity. Indeed, if the countries that hang back are an important part of the world’s economic system, the result must be to leave the disparity of price levels partly uncorrected, with undesirable consequences to everybody. . . .

The picture of an endless competition in currency depreciation is completely misleading. The race of depreciation is towards a definite goal; it is a competitive return to equilibrium. The situation is like that of a fishing fleet threatened with a storm; no harm is done if their return to a harbor of refuge is “competitive.” Let them race; the sooner they get there the better.”

Is there a coherent point in here somewhere?

A target for nominal GDP would be a target for real GDP growth and inflation – therefore it would be a target. It would have the advantage of not forcing the target to be continually respecified, as you appear to be advocating.

If inflation is created this year, then it can be pulled back once a recovery has taken off – policy makers do have the ability to engage in contractionary policy, remember.

The idea that inflation expectations will suddenly become “unhinged” is a speculative hypothesis – it assumes they’ve been hinged all this time, for a start.

It does seem rather odd that a blog that consistently argues for more expansionary fiscal policy is suddenly against more expansionary monetary policy. Because expansionary fiscal policy isn’t inflationary at all, is it?

JR

I’d be amazed if even 1 per cent of those calling for expansionary fiscal policy whilst decrying expansionary monetary policy on the basis it is inflationary, have any idea fiscal policy can be inflationary too.

Aren’t they meaningless numbers in a computer? Money is fundamentally a symbol. Isn’t the real economy only loosely bound to it?

@ James Reade,
Good point about the target for growth rising with inflation. Bad point about expansionary fiscal policy being the same thing. This economy has a demand problem, and primarily needs a demand solution, ie building things.
Also, I’m not saying that expanding QE is a bad thing. I’m simply saying that they want inflation but won’t admit they want inflation.

“This economy has a demand problem, and primarily needs a demand solution, ie building things.”

Not all agree that there is just a demand constraint. Some are saying supply capacity has been taken out by the flagging economy.

There is also the arcane claim [from Richard W amongst others] that “money is neutral in the long run”. But if monetary expansion increases demand and output in the short run then the long run starts off from a higher initial base.

Try this analysis by Bill Martin and Bob Rowthorn on whether the British economy is supply constrained II:
http://www.cbr.cam.ac.uk/pdf/BM_Report3.pdf

Luis is right – fiscal expansion can also be inflationary. Hence my point @2 that it is cruical to decide whether the economy is demand or supply constrained. The pre-keynesian view, which still previsals in places, was that the money supply is neutral – meaning that changes in the money supply affect absolute prices but not the real economy in which any unemployment is voluntary because there is an unwillingness to work at the going real wage.

Dan

I think you are right that they want inflation but can’t admit it. Since Thatcher, it would be like admitting to some bizarre sexual perversion.