The Real “Magic Money Tree”
Chris Dillow writes “Monetary policy not the answer” in Investors Chronicle, but left me wondering about the question to which “monetary policy” is not the answer. The article raises the topic of whether the Bank is already targeting NGDP, which I’ve addressed before. The key disagreement is Chris’ concern:
And there’s a reason to fear monetary expansion won’t do so much to raise nominal demand.
There is much less room for monetary policy support to the economy now (rates fell from 17% in 1980 to 8.5% in 1984 as Wolf notes today) whilst households are much more indebted today than in the early 1980s.
Again: if you really believe printing money won’t raise NGDP, your first policy suggestion should be to test out the reductio ad absurdum which Ben Bernanke applied to Japan: if the BoE can print money and buy up assets in the rest of the world without boosting domestic prices and NGDP, the BoE has unlimited purchasing power.
Forget about negative real interest rates (which were also ex post negative in the 1970s; also a good time for fiscal stimulus?), forget household debt, and forget the “dearth of investment opportunities”. Money matters. If it is impossible to print money and raise NGDP, you’ve found the biggest free lunch in history. The Bank of England can buy up all the assets in Europe, then in the US, and so on around the globe, for no cost at all.
Doing some kind of “capital spending splurge”, the current Keynesian favourite, is surely unnecessary if you do not believe in the unlimited power of the printing press to raise spending. If the government could print money and buy foreign assets without raising UK NGDP and prices, they should do so until they own enough assets to produce income covering current spending. Then cut all taxes to zero – that’s a fiscal stimulus I’d sign up for.
Obviously the above is a totally stupid idea, and we don’t need to try it to find that out. The key point is that some level of monetary expansion must be possible to produce any desired level of spending on output. The Bank has really already demonstrated exactly that; they have raised total spending on output in the UK economy, nominal GDP, to its highest ever level in history in 2012, despite fiscal austerity and the zero bound.
The problem we have is that the Bank does not want total spending rising any faster than is compatible with keeping 2% CPI inflation in sight. That is what they see as optimal policy, and that is the real problem.