These are dark days for inflation hawks. For four years, they have warned that the Fed's bond-buying risks a return of 1970s-style stagflation. And for four years they have been wrong. Not just wrong; historically wrong. Indeed, core PCE inflation, the Fed's preferred measure, just hit an all-time low going back 50 years. That's a lot of years.
It's derp. Now, as Noah Smith defines it, derp means being loudly un-empirical. In other words, refusing to change your mind even after reality disproves what you believe over and over and over again. But the inflation derpers are smarter than the average derper. They realize they can't keep crying inflation when there is none, and have anyone (even the Wall Street Journal editorial page) pay attention. So now they cry financial instability and uncertainty instead. But that doesn't mean they've changed their minds: they still want the Fed to tighten, and tighten now. It's just higher-level derp.
But there's a science to this higher-level derp. Rules to follow. What are they? Well, just look at Stanford professor John Taylor's latest Wall Street Journal op-ed, which might be the ur-text of fact-free Fed fearmongering. Taylor (of the eponymous monetary policy rule) has spent the past few years fulminating against the Fed's bond-buying, because ... inflation? That's certainly part of it for someone who always carries a Zimbabwean hundred-trillion dollar bill around with him like Taylor does. But the other part of it is his idea that uncertainty over whether the Fed will end quantitative easing too fast is hurting the economy more than quantitative easing is helping. Now, this critique isn't much of one, and isn't specific to bond-buying. You can say the same about any interest rate cut. Maybe the Fed will wait too long to raise rates, and inflation will spike. Or maybe the Fed will raise rates too quickly, and send the economy back into recession. Neither of those are reasons not to cut rates (or buy bonds) in the first place. Of course, Taylor thinks it's different this time, because the Fed will have to shrink its balance sheet rather than just raising rates. But the Fed doesn't have to shrink its balance sheet; it can just raise the rate it pays on reserves.
Don't be worried if this all seems confusing. It is. It's all about inflation, or maybe not. Or bubbles. Or uncertainty. It's hard to follow the argument -- but not the conclusion. That's always tighter money. But there is some good news: anybody can inflation derp like a pro if they follow these two simple steps.
1. Don't use any evidence. Well, how could you? Inflation is at all-time lows. There are no signs of the kind of credit froth that could make the financial system unstable. Nor are there any quantifiable signs of uncertainty holding back growth. Instead, you should just say that lots of famous economists agree with you -- and they don't need evidence either! If all of you believe it without good reason, erm, it must be true?
Now, there are two notable exceptions to the no-evidence rule. First, you can cite fake evidence, like when Niall Ferguson cited tinfoil-hat-wearing Shadow Stats as "proof" that inflation was really double-digits. And second, you can get things wrong in a way you think helps your argument. Taylor, for example, tries to make Fed apologists look silly by saying they now blame the weak recovery on state and local spending cuts. Now, that was one of the things Fed officials talked about a few years ago, but not now. In fact, Bernanke just said that less state and local austerity is one of the reasons the recovery might pick up soon. It's federal austerity that's holding the economy back now -- and a lot of it. Indeed, the deficit is now falling faster as a percent of GDP than it has in any year since 1969. Maybe Taylor doesn't address this, because it would be impossible to dismiss? In any case, it's the kind of mistake inflation derpers shouldn't worry about: people who know enough to spot it weren't persuadable anyways.
2. Mention the 1970s. This is crucial. Now, the rest is a lot of hand-waving and arguing from authority, but this is where inflation derpers are on much more solid ground. The 1970s did happen. This is not in dispute. And loose money fueled high inflation then. This is not in dispute either. Of course, our problems today are the opposite of our problems then, but ignore this. Say something about how we need "long-term thinking" and can't avoid the kind of "painful choices" that -- bonus points! -- Paul Volcker made. This will make people in Washington think you are wise.
And that's it! If you can master these two things, you too can argue for inappropriately tight monetary policy that could choke off the recovery. A lifetime of never having to change your mind awaits.
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