Department of "Huh?!": What Is Bill Gross Saying? Edition by DeLong

If nominal GDP growth had just jumped from 4%/year to 7%/year and if the consequence had been the real growth had gone from 2.5 to 3.0%/year while core inflation had gone from 1.5% to 4.0%/year and nominal ten-year Treasury rates had gone from 2.5 to 6.0%/year, I would say that the market had spoken: thet too much (risky) debt could not be cured by issuing lots more (safe) debt. But if that is happening at all, it is happening in some alternative universe: not here, not now.

Here and now the principal immediate disease of the economy continues to be (in Wicksellian terms) that the natural rate of interest is lower than the market rate and is in fact less than zero, (in monetarist terms) that nominal GDP is too low and is expected to grow too slowly given the current level of wages and prices, (in Bagehot-Minsky-Kindleberger-Reinhart-Rogoff-Koo terms) that the risk tolerance of the market is too low given the still-extraordinary level of leverge, (in Bernanke-Gertler-Hubbard terms) that a wave of moral hazard and adverse selection has overwhelmed and broken the credit channel. All of these diagnoses are not quite identical, but the overlap between them is enormous. And they all admit of the same cure: Jubilee. A reduction in risky debt and its replacement in portfolios by an increase in safe debt. This can be accomplished through either guarantees of risky debt by the credit-worthy, by explicit write-downs and refis, or by the I-word. [Inflation - ed.]

Oh, there are other more chronic diseases of the American and the world economy: globalization one wrong, overfinancialization, overhealthcareadministrationization, rising inequality, financialunderregulationization, et cetera--and some of these played a role in setting up the current crisis. But you don't have to fix a tire through the puncture. And we shouldn't believe that we must.

Bill Gross is sort of an MMer. He believes creating demand is the way to go, but it's being blocked in all advanced nations. Although Gross did suggest the GSEs refinance unilaterally at the expense of the Chinese and rich investors.

If risky debt is replaced in portofolios (balance sheets) by safer debt, this will lead to more spending / investment.

DeLong writes "that the risk tolerance of the market is too low given the still-extraordinary level of leverge, (in Bernanke-Gertler-Hubbard terms) that a wave of moral hazard and adverse selection has overwhelmed and broken the credit channel."

Which is maybe why the Fed and Obama administration will hit the mortgage market with a jubilee at the expense of the Chinese and rich. Which is why higher inflation and targeting NGPD should be used at the Fed.

Why can't the Fed just say our long term goals are NGDP S18 trillion*/year and core inflation at 2 percent?

DeLong:

If nominal GDP growth had just jumped from 4%/year to 7%/year and if the consequence had been the real growth had gone from 2.5 to 3.0%/year while core inflation had gone from 1.5% to 4.0%/year and nominal ten-year Treasury rates had gone from 2.5 to 6.0%/year, I would say that the market had spoken: thet too much (risky) debt could not be cured by issuing lots more (safe) debt. But if that is happening at all, it is happening in some alternative universe: not here, not now.

This seems to be the question, whether QE can work or has worked. Does it need to be sustained to work? Did QE1 and 2 work?

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* or whatever the trend rate of growth is for the economy running at capacity.