In the last few weeks, I’ve spoken with several people who say they can “feel a recession coming.” One said he’s bearish and thinks this is not going to end well. Another says, “Every time we hit very low unemployment in the US, a hard crash follows.”
It’s true. The United States has never had a soft landing coming out of a boom. But that doesn’t mean we can’t manage one this time. It’s not a matter of consumer sentiment, TV pundits predicting the future, or a Chinese/American trade war. It’s a matter of monetary policy.
The amount of money in circulation can either stimulate growth and spending or discourage it. After a speech by the Nobel-laureate economist Milton Friedman at Stanford in 1998, a reporter summarized:
Speculators aren’t the evil beings government leaders make them out to be. The International Monetary Fund and World Bank make people poor and destabilize countries. The Japanese central bank has made the same mistake as the U.S. Federal Reserve did when it started the Depression, slamming the brakes on printing money too fast.
The Keynesian view of our economic condition is that the Fed is out of ammunition. Once interest rates are close to zero, the Fed has no more firepower to stimulate the economy, save the politically unfavorable quantitative easing — injecting money into the economy. Many people feel that — like a loan that must be repaid — these injections must, some day, be undone to restore equilibrium.
On the other hand, the Monetarist view is that the government doesn’t need to be in the interest-rate business at all. Monetarists believe the market should sort out interest rates and governments shouldn’t interfere with them. They believe it’s the central bank’s job to add money into circulation when aggregate demand drops and pull it out of circulation when demand overheats.
It’s easy enough to do. To stimulate, simply create money out of thin air, use it to purchase assets, put the assets on your balance sheet (pull them out of circulation), and let the economy absorb the new money. To cool off the economy, do the reverse: sell assets from the balance sheet and suck cash out of circulation. Do these two things as needed and adjust daily, according to market signals rather than "Fed guidance" or Phillips-curve models.
While simple in principle, it requires the Fed to let go of their Keynesian models and give the markets the assurance that they will “do whatever it takes” to keep long-run economic growth on target by continually adjusting the amount of money in circulation.
Rule-Based Monetary Policy
Market monetarism is a growing movement of support for a market-based approach to long-run economic growth called Nominal GDP Level Targeting. This is a way of automating Fed policy so 1) the Fed hits its nominal GDP target at the end of each year and 2) everyone knows what to expect, so there are no uncertainties. This gives monetary policy a spring-like response to shocks that help restore growth at exactly the time needed while also managing inflation.
This kind of autopilot for monetary policy would go a long way toward stabilizing the US economy and provide the long-run growth we need to keep up with Asia. It would also have a strong stabilizing effect on countries around the world who watch what the Fed does and often copy it.
In summary, using Keynesian models, recessions are unpredictable and may be triggered by animal spirits, supply and demand shocks, or troubling narratives. Under Keynesian models, the people of Japan have been starved of the cash needed to stimulate their economy for three decades. But monetarists believe that if the US goes into recession, it will be Jerome Powell’s fault. Nominal GDP Level Targeting is a regime that should prevent multi-quarter recessions and assure everyone of long-run economic growth indefinitely.
To learn more about nominal GDP level targeting, read my Short Primer on Money.
Advanced students will be interested to read An Overview of Nominal GDP Level Targeting by David Beckworth.
David Siegel is the author of five books on technology and business and two e-books on economics. His full body of work is at Dsiegel.com. His upcoming book is called The Machine Economy. His blog and newsletter are at Permissionlessfinance.com