One day I just might read something from John Tamny that makes sense, but alas not this week:
A frequent counterargument to the notion that current Federal Reserve policy is inflationary centers on two market indicators: TIPS spreads and the yield on long-term Treasuries. Neither suggests that inflation is a problem.
Well, let’s see. Nominal interest rates are around 4.8% and real interest rates are around 2.3%, so it does seem expected inflation is around 2.5%. Tamny follows his opening with some bizarre statements and his account of monetary policy since 1971. Along his tour through our recent monetary history, he talks about gold prices for some bizarre reason. It was this line that made me stop reading:
Investors today are arguably pricing in deflationary Fed policy from not long ago (1997-2001), not to mention the likelihood that the Fed’s memory is sensitive enough such that no 1970’s redux will be countenanced.
Huh? Yes, monetary policy was restrictive during the latter part of Clinton’s second term, but by what measure would anyone be foolish enough to argue that we had tight monetary policy in 1997 or 1998? Interest rates were generally declining despite a booming economy. And whether one measures the growth rate of monetary aggregates using the monetary base (MB) or M2 measure of the money supply, we did appear to have a somewhat expansionary monetary policy until late 1999 or 2000. As far as 2001, monetary policy turned quite expansionary leading to lower interest rates in the hope of reversing the recession.
Tamny wants us to believe that monetary policy has become too expansionary even though the growth rates in the monetary base and M2 have slowed and interest rates have gone up. And his evidence for his very bizarre view? Oh yea, the nominal price of a certain commodity known as gold.
Update: Reuven Brenner makes it explicit:
Rather than manage short-term living costs, our central bank should simply manage the dollar … In the last decade, during the same years that the CPI hovered in the 2 to 3 percent range, the U.S. dollar was volatile relative to currencies of countries where measured CPI also varied within the same low ranges as in the United States. The measure of the U.S. real effective exchange rate relative to the seven major currencies varied between roughly 80 in 1995, to 120 in 2001, and back to 90 in 2005 … Briefly, the U.S. Federal Reserve should manage monetary policy by first distinguishing between “things” (changes in global demand and the supply of a currency’s liquidity) and the “noises” (serious resource misallocation) these “things” are making.
As long as there are real shocks, pegging the exchange rate and avoiding macroeconomic instability may not be incompatible. But this is precisely why some of us prefer market determined exchange rate.