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What Would It Look Like If We Had NGDP Targeting Today?

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Published : May 15th, 2020
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Category : Editorials

U.S. GDP was down -4.8% in the first quarter of 2020, and the second quarter might be in the neighborhood of -25%. These are annualized rates of “real” GDP growth, so in terms of nominal GDP, 2Q might be about -6% from a year earlier.

Before, we imagined what all this might have looked like, if we had been on a gold standard system. Since the dollar’s value vs. gold hasn’t changed all that much since February (although it has declined somewhat), we can see that there wouldn’t have been too much difference, in terms of currency value, if we had been on a formal gold standard system — at least, thus far. (I think things will get much messier, later.)

Now, let’s imagine what might have happened if we had been on an automatic “rules-based” sort of Nominal GDP targeting system. One such proposal includes a suggestion for a steady growth rate of NGDP of 3.65% annually. Others have suggested a little higher number, around 5.0%.

What would have been the reaction of this “automatic” system to the present crisis? To simplify somewhat (leaving aside the Federal Reserve’s many actions to support specific portions of the economy via forms of direct lending and asset purchases), the system would have, somehow, crowbarred what actually happened into its +3.65% target. Basically, for 2Q it would turn a -6% figure into a +3.65% figure, or a +9.65% change in the space of a quarter, purely by monetary tomfoolery alone.

And how would that have happened? Would unemployment and job loss have been any different? Would the decline in revenue of hotels or cruise ship operators or restaurants have been any different? Would it make sick people well again? They may have been a teeny bit different, but basically, this would have come about via an abrupt devaluation of the currency, of such magnitude that it delivers a +9.65% effect to NGDP in the space of a quarter. This devaluation itself would have a number of effects; among them, serious doubt as to the viability of the U.S. dollar, especially among those (everyone outside the U.S.) who don’t have to use the dollar.

Try to imagine what that might look like.

Some people might argue that this would be a good thing. Maybe, although, I think: maybe not. It doesn’t matter, because we wouldn’t discuss it. It would happen automatically, in this “rules-based” system. Others might argue that the NGDP target would just be a major guidepost in a system that is basically discretionary “seat of the pants” improvisation. But, how would that be different from the ever-changing ad-hoc improvisation that has been the rule since Richard Nixon “temporarily” left gold on August 15, 1971? NGDP is already a major guidepost of policy.

“But that’s not fair!” the NGDP advocates may cry. “This is an unforseeable and, in large part, unprecedented situation!” As anyone who has tried to predict the future knows, the future tends to be unforseeable and unprecedented. But: it happened. In the real world, stuff happens — the U.S. Civil War, World War I, the Communist Revolution in Russia, the Spanish flu of 1919, the Black Plague. Did people predict those beforehand? Did they wail “it’s not fair!” afterwards?

My point is: NGDP Targeting is an imaginary monetary system designed for an imaginary world. This is easy to see now.

Back in the real world, what people really want is: currency stability. That is: stability of currency value. For thousands of years, this was achieved by linking the value of the currency to gold and its adjunct, silver. By the end of the nineteenth century, it was gold alone. Lots of things happened during those thousands of years. Governments abandoned this gold/silver discipline over and over. But, nobody ever found a better system.

For now, almost nobody wants a currency linked to gold. It seems that what they really want is: a “debt jubilee” accomplished by means of what Adam Smith called, in the last chapter of The Wealth of Nations(1776), a “pretend payment.” But, after all that is over — when the world Crisis that is just beginning now later begins to burn itself out, and we begin the process of building new institutions to replace our old, failed ones — let’s get together just as governments did at the Mt. Washington Hotel in Bretton Woods, New Hampshire in 1944, and create a new monetary system that is not based on imaginary solutions to imaginary worlds, or making stuff up as we go along; but rather, one based on gold.

(This item originally appeared at on May 14, 2020.)

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Nathan Lewis was formerly the chief international economist of a firm that provided investment research for institutions. He now works for an asset management company based in New York. Lewis has written for the Financial Times, Asian Wall Street Journal, Japan Times, Pravda, and other publications. He has appeared on financial television in the United States, Japan, and the Middle East.
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