The Fed Needs To Embrace NGDP
For all the mistakes the Fed make, one of the biggest is they are looking at the wrong statistics. This is what happens when you listen to a bunch of economists who are nothing more than academics.
Most have heard of the term "Real" GDP. This is where the growth rate has the inflation rate subtracted. This, according to the "experts" yields a better metric of how things are going with the economy.
Of course, this shows how it is a pinhead exercise and nothing more. Does anyone do this in the real world? Does anyone recall a CFO on a earnings conference call alluding to the "inflation adjusted net income" for the quarter or year? Of course not.
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CEOs and CFOs deal in the real world. The reason is because their earnings is real money. We see the same happen on individual's tax returns. Have you ever seen your inflation adjusted earnings?
My opinion is the problem is that too much of what the Fed does is suggested by economist who are academia in nature. They are not entrepreneurs or people who actually operated businesses.
Thus, the true metric of what is going on is Nominal GDP (NGDP). It is a number that the Fed does not openly release and is never mentioned by the financial media. However, it is a metric that makes things very easy for both the Fed and businesses.
Nominal GDP is the GDP without the removal of inflation. Just like a company does not remove that from its net income, the Central Bank should do the same.
To truly turn the system around, it is a simple process. Instead of worrying about the inflation level, simply focus upon NGDP. It matters none to business people if the increase comes from inflation or growth. The only concern is getting the overall growth.
It would be best for Congress to set a NGDP of about 7%. This would match the growth period of the 1980s and 1990s. Sadly, due to Fed policies (ignorance?) of distributing easing through the banking system, that rate dropped to about 4%.
This shows the economy is short of the needed resources. A simple system is used: if above the 7%, tighten; blow ease.
Obviously, the Fed is falling behind the curve and it is getting worse. Since it doesn't have a policy like this, it is completely missing the boat. The closest metric is the NDGP gap which shows how far ahead or behind what the Fed considers to be the Neutral Level of NGDP. This is the level where it sees no inflation nor deflation.
Sadly, even this metric is not strong enough. Nevertheless, by that measure it is easy to see how it is falling behind.
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Notice how we were not able to achieve a plus status in the past 13 years (and counting).
As I have wrote on a number of occasions, the fact is central banks around the world are falling further behind. No matter what they do, they still are lagging. Most economic indicators tend to tell a similar story: a multi-decade trend of worsening conditions.
What economic impact does technology have on monetary policy? The answer should start to become clearer. The downward pressures caused by technology is only going to get stronger. Thus, without a radical change in mindset of the central banks, and the population at large, we will see these trends continue at an accelerating rate.
We live in a different world yet many of these economic "leaders" are still operating like it is the 1970s. Unfortunately, their policies are obviously not working.
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STOPTo support your work, I also upvoted your post!
I don't think our leaders really understand the extent they're playing with fire when they refuse to acknowledge how inadequate and/or wrongly constructed these stimulus programs are. I saw Jamie Dimon on TV the other day, smiling and talking about "the wealth effect" brought about by the stock market going up (despite the real economy being in such a sorry state). Wall Street and all the bankers are benefiting tremendously from all the stimulus money with nary a dime going into the pockets of Average Joe except in the form of a lower interest rate on his mortgage, of course. The UK is doing much better than the US is this regard. They have been putting real money into the pockets of people who've lost their jobs as a result of the pandemic and the lock-downs.
What you get of course, is people fearing that all hell will break loose because of all this excess inflation. That view is completely false. Also, I have to wonder whether these people would rather see actual Nazis winning all the elections. You can crush the middle class only so much.
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We are seeing marxists making their move...same result as you stake.
As for the likes of Dimon, of course, he talks about that since that is what he knows. He is very close to the Fed, hence has benefited greatly. Those who have stocks or get money from the Fed are sitting pretty.
The rest, not so much.
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