When the famed Harvard macroeconomist Martin Feldstein nailed his theses to the door of the Federal Reserve on April 19, 2009, the great monetary theologian tellingly entitled his missive, “Inflation is Looming On America’s Horizon.”
Feldstein foretold of a dark future. The “outlook for the longer term is more ominous. The unprecedented explosion of the U.S. fiscal deficit raises the specter of high future inflation.”
The federal H-bomb of red ink was nearly catastrophic on its own, warned Feldstein, but was being amplified by a floodtide of wanton Federal Reserve money-printing. “The link between fiscal deficits and money growth is about to be exacerbated by ‘quantitative easing,’ in which the Fed will buy long-dated government bonds.”
Feldstein hinted it was time to short bonds, and concluded, “It is surprising that the long-term interest rates do not yet reflect the resulting risk of future inflation.” At the time of his prognosticating, 10-year U.S. Treasuries offered a 4.97% yield.
Let us hope for the Feldstein family that Martin left the investing to someone else. The same 10-year Treasuries offer a 2.28% yield today.
In fact, as the always-perspicacious Kevin Erdmann of Idiosyncratic Whisk just pointed out, the CPI core sans housing was up 0.6% year-over-year in September, which is the lowest level for that metric in more than 50 years. The Fed’s preferred measure of inflation, the PCE core, is up 1.4% on 12 months at latest read.
Sadly, as chronicled by David Glasner’s Uneasy Money, Feldstein doubled and tripled-down on his view between 2008 and present, nailing more and more theses on the Fed’s door with every passing year.
As exemplified by Feldstein, the orthodox macroeconomics profession appears adrift, and worse, unwilling to reconcile observations with theory.
The least popular topic in conventional macroeconomics today is Japan, where the Bank of Japan has bought back 45% of the nation’s huge national debt; where the BoJ holds interest rates at 0% on 10-year government bonds; where the Bank of Japan charges negative interest on reserves; where government (like the U.S.) cannot balance the national budget; but (unlike the U.S.) where there are more job openings and than job seekers—and where inflation can’t reach 1%.
Obviously, what is “loose” or “tight” monetary policy needs to fully redefined, and what QE actually does need a solid rethink.
In the meantime, the counsel of Market Monetarists is probably the best. A central bank should aggressively and publicly pursue monetary policy so that nominal GDP rises to a higher trend level and then grows at a desired rate, perhaps a band between 4% and 5% annually. “Failure” would be falling below or above the band for more than a few months.
It is true that every developed nation has structural impediments that impede economic growth, and it is true those hurdles to growth should be lowered. It is sadly also true that Western democracies are largely incapable of doing so. For central banks to toss the growth ball into the lawmakers’ court is an abdication of responsibility.
The monetary theologians, such as Feldstein, have and would suffocate the economy in pursuit of their faiths. A better approach for a central bank is responsibly encourage growth with the economy and structural impediments we have.
PS. Apologies to our excellent Lutheran friends. Of course, it was Martin Luther who nailed his 95 theses on the door of the Castle Church in 1517, primarily to condemn the sale of indulgences.