The Money Illusion

Some months ago, I heard Scott Sumner (PhD Economist) on a Podcast I follow (EconTalk with Russ Roberts) and was intrigued.  He kept arguing for growth in Nominal Gross Domestic Product (NGDP), which is denominated in current dollars which may be less valuable than last year's dollars.  Thus, NGDP can be different from Real GDP.  One can have nominal growth simply by printing more currency even in an economy with RGDP of zero.  This seems somehow wrong to me.  It's like he wants to trick the economy into thinking there is growth even when there isn't.  Nonetheless, I found his blog and have followed it since then.  He says the darnedest things and makes a surprisingly good case.

Sumner holds that the Federal Reserve should have a targeted NGDP, assuring that the economy is constantly expanding.  I have long thought that money was supposed to be a reliable store of value but Sumner is proposing to forever decrease its value through this constant rate of inflation.  I was long a supporter of the gold standard but that is unrealistic since the supply of gold is not growing at a rate equal to the growth of world economies.  As such, the gold standard would effectively shrink the money supply.  Likewise, it is difficult to target fiat money to the actual growth rate and that might, in recessions, prove to be a problem by again shrinking the money suppy (as happened in the Great Depression).  So, I find myself in agreement with much of what he has to say but still find the idea of constant, planned inflation disagreeable.

Some other things Sumner has declared have also grated on me.  For instance, he proclaims that we have a very tight money supply, which seems impossible with all the Quantitative Easing.  How can you pour cash into a stagnant economy and not have inflation?  He has explained but that bit has yet to make sense for me.  Still, he keeps me coming back and has surely changed some of my thinking.  He may yet win me over to his NGDP targeting and I don't think I will forgive him if he does.

Check out his blog here:

http://www.themoneyillusion.com/