Monetary Realism

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FOMC Meeting: A Move Towards Elastic Deficit Targeting

Lots of people are talking about how today’s change in FOMC guidance is a move towards NGDP Targeting.  They might be right.  And while I don’t think NGDP Targeting is all bad, it’s definitely not my preferred approach.  I’ve recently started to discuss something called “elastic deficit targeting”.  I explained it briefly here:

“What I did here is sort of like Mike’s TC Rule. I’ve always used 2 for Okun’s law, but maybe that’s not as precise as you like.

I also didn’t target inflation in here. I am just using nominal GDP. No population adjustment either. Just a flat NGDP calculation using the unrate:

(unrate-unrate_target) * [(0.01*current_NGDP)*2] = $1.184T

If we wanted to put this into policy form you take it on a quarterly basis and slap a name like “elastic deficit targeting” on it. Let the Congress vote on it each quarter via specific tax cutting policy. Bam. Let the Fed mesh their policies with it. I rather like the Fed’s current stance of remaining accommodative until “at least” 2015. Let congress work with that. How can we not pass something like this? It seems like a win win.”

Mike Sankowski’s TC Rule is essentially a form of elastic deficit targeting.  My calculations are a bit different than Mike’s but similar thinking.

But the funny thing to me is that we probably have to go through another monetarist economic experiment before we would ever actually get something like this going.  In other words, the Fed goes on a 15 year experiment with NGDP Targeting, we find out it doesn’t work quite as well as some might expect and then we all agree we like lower taxes, attach an elastic policy measure to tax cuts and implement a full bore elastic deficit targeting program.  Of course, we have to let the experiment with NGDP Targeting play out first.  We’ll get to the fiscal targeting.  Just don’t hold your breath.


Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering asset management, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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11 Responses

  1. Bill says


    Just wanted to say “Thank You”. My economic views have been changed recently, thanks to you and your fellow contributors to this site. I had been operating under the old economic paradigms until earlier this year, but found that it wasn’t explaining what had actually been happening over the last many years. I then stumbled upon MMT, and found that it explained many things about how things were actually working, but there were some nagging problems with it, and it didnt seem like a completely coherent theory — indeed, it came across as just a manufactured tool for justifying liberal policy desires, but was wrapped along with enough truths/observations to make it pass as a legitimate economic theory.

    But then I recently came across this site, and your article on Understanding Monetary Realism, and everything finally clicked. It made perfect sense, and described the way our banking and monetary systems work, but without the flaws and overt politics inherent in MMT.

    Thanks again, and keep up the great work!

    • Cullen Roche says

      Hi Bill. Don’t thank me. Thank everyone. My views have been primarily shaped by the other guys who write here in addition to Brett.

      Thanks for taking the time to read our content. It’s relatively new views on the world of money so I can understand people who have an apprehension about its validity!

  2. Steve Roth says

    Also: See chapter 21, “Intuitions vs. Formulas” in Kahneman’s magisterial Thinking, Fast and Slow.

    “…an algorithm that is constructed on the back of an envelope is often good enough to compete with an optimally weighted formula, and certainly good enough to outdo expert judgment.”

    Or to quote me, riffing off SRW and bringing expectations into the mix:

    “Automatic stabilizers are the key to effective 1) policy and 2) expectation-setting. Because 1) They happen, and 2) People know they’re gonna happen. Could be fiscal or monetary, largely a question of where you inject the money.”

    • Michael Sankowski says

      haha. That’s how I did the TC rule, and the keith moon economics curve.

  3. Steve Roth says

    Have you guys seen this UBS piece?

    Very interesting given Michael’s suggestion of 4% suggested target rate for inflation in the TC rule.

    That’s exactly the point where, historically, equities’ value is maximized relative to earnings. Where PE is highest.

    I have an intuition that this paper is incredibly important to our discussions of monetary policy, but don’t have the wherewithal to articulate why…

    • JKH says

      “4% is the threshold, or the sweet spot, where equity prices are maximized.”

      I think that tells you nothing about the ideal trend rate of inflation. It sounds to me more like a Minsky inflection point where equities achieve their highest value.

      And the fact is that equities eventually get crushed in Fed tightening cycles, which is probably what happened ultimately in the data that generated that 4% point.

      Problem is we’re developing a new generation of traders that won’t know what a tightening cycle looks like.

  4. Erik V says

    I think we still need to work on the marketing. Anything with the word deficit isn’t going to fly with the deficit hawks. We need a name that focuses on the tax-cutting aspect of it. The FAST Act. Fiscal Automatic Stabilizer Tax Act.

    • beowulf says

      We don’t want to starve the economy, we want to FAST.

      • Erik V says

        lol, yeah I can come up with better at some point, but everyone in Congress is obsessed with giving their bills cool acronyms, so I joined the club.

    • Cullen Roche says

      Yeah, we’re brainstorming. Good thoughts. That hadn’t crossed my mind, but you’re right…. Fiscal Automatic Stabilizer Tax Act is a lot to swallow….

  5. Michael Sankowski says

    I like the elastic deficit targeting meme. The entire point is we need enough spending so we get to a smart and full level of demand.

    We are very close to functional finance here at MR.

    But wow – functional finance is such a weird phrase.