From: "Angell, Wayne (Exchange)" <wangell@* * * * *.com>
To: "'Jude Wanniski'" <email@example.com>
Subject: RE: deflation
Date: Sun, 12 Nov 2000 22:11:37 -0500
The Monetary Affairs section of the Board, the staff of the St. Louis, Cleveland, and other reserve banks were all trying basically from Nov 1979 to August 1987 to facilitate the Board and FOMC leanings to target a reserve supply weekly number that was consistent with the HH Act requirement to target and report on money growth. It seemed cumbersome, and some Board members, Manley Johnson, preferred to scrap money--reserve targeting for interest rate targeting. I was opposed in principle to falling into the trap of interest rate targeting. I would not say interest rate targeting does not work but that it works in unhelpful ways.
I have never suggested that a commodity price index should be targeted. In that, I did not prevail regarding interest rate targeting I pursued the job of trying to sell the core commodity index and the price of gold, along with MJ suggestion of the exchange value of the dollar, as indicators of whether the targeted funds rate was too high or too low. That is why I called it round-about. However, Art Laffer did suggest that I was providing a price rule for commodities--he called it the Angell band. I was guilty of not correcting Art, just as I did not correct your view that I had accepted a $350 price of gold, not because I lacked courage, but because I held and hold to the principle that those of us in the minority need to be open to accepting a broad band of agreement.
Of course, which you may agree, that if the Federal Reserve Board, the FOMC, and amendments to the Humphrey Hawkins act had determined to adopt a gold targeting strategy in 1979, then the disinflation process could have been more efficient than the reserve--money targeting strategy. Gold targeting would have been superior in that: 1) Credibility and transparency could have made disinflation more efficient than reserve targeting. 2) If written into law or preferably the Constitution then we would not been dependent on the independence of the Fed nor on getting perfect people who had the combination of monetary, other macroeconomic understanding, and persons with political skills to sell the Congress, the President, and the American people on the wisdom of managed money.
My perspective has always been that we could not pull gold targeting or the gold standard out of the air in a post-Keynesian and post-Freidman world that saw monetary policy as a means to achieve economic growth and the natural rate of unemployment. What is and was the best path?
* To demonstrate the economic welfare advantage of price stability through price level targeting.
* To observe the price of gold that is consistent with price stability so as to avoid a considerable price level risk, both inflation and deflation, by arbitrarily choosing the price of gold. Whereas in 1979 the overhang of dollar liquidity was so great that the price level risk of determining the ratio of the price level of 1979 with the price level in 1924 multiplied by $20.38 to determine the estimated correct price of gold was less than Volcker's money growth rate experiment. But, after Volcker pursued a more rapid disinflation course that was riskier than a gold price target, then it seemed to me that getting back on track to more gradual disinflation was politically more viable than attempting to win a gold standard.
* Working to influence Alan Greenspan, both in the period from within and without, to avoid monetary policy mistakes on seeking price stability would vindicate price level targeting. Excuse me for saying, without bragging, that my price level appraisal of monetary policy has been consistently correct so as to both influence Greenspan and to have achieved what I called the "New Era" first advocated by my August 1985 statement to Dole which I used in my Senate confirmation testimony. Admitted danger is that I am tempted to believe that managed money can be competitive with gold from this point forward--but only for a limited time period. Your job is to keep holding me accountable. My job is to persuade Greenspan to propose amending the HH Act which is totally inconsistent with price level targeting.
* We are not currently in a viable political environment for moving to gold price targeting. Commodity index targeting is not on par with gold price targeting. But, a core commodity index is, in my opinion, of at least of general usefulness as an indicator of the appropriateness of any current funds rate target. During the period of Bank of England, European Central bank and Swiss National Bank gold price sale announcements of sales and no-sales my core commodity index seems to have had fewer distortions.
* Build an appreciation for price stability and then amend HH to specify price level targeting.
* Persuade the political community on making price stability permanent by first increasing the role of gold in explanations of policy actions.
* Determine whether to target the price of gold.
* Debate the pros and cons of the appropriate price of gold. My preference is likely to be toward pure price level stability and hence I am apt to prefer a lower price of gold than you or either of the banking committees of the Congress.
So, I admit that I am not as good an advocate as you are as I am too pessimistic that I am in the minority on zero inflation followed by price level targeting. Nevertheless, you and I should be able to recognize that even with our differences we are allies. I hope I have answered your questions. Alan Greenspan does not like my reference to zero inflation either.
I made a rush trip to BA Argentina Thursday night. I am several e-mails behind. I will attempt to get back to your most recent reply first.
From: Jude Wanniski [SMTP:firstname.lastname@example.org]
Sent: Friday, November 10, 2000 4:25 AM
To: Angell, Wayne (Exchange)
Subject: RE: deflation
AS PROMISED, HERE IS MY RESPONSE TO YOUR E-MAIL. I'LL USE ALL CAPS JUST TO KEEP THE DIALOG CLEAR. HOPE WE CAN KEEP THIS UP... BY THE WAY, MY LESSON THIS WEEKEND AT SUPPLY SIDE UNIVERSITY IS ABOUT THIS TOPIC... PLEASE GIVE IT A LOOK HTTP://WWW.POLYCONOMICS.COM
At 05:46 PM 11/7/00 -0500, you wrote:
I would agree that an interest rate targeting strategy is more roundabout to achieve any gold or core commodity price index target as compared to a reserve targeting strategy.
IT IS NOT ONLY LESS "ROUNDABOUT." IT WORKS. AN INTEREST-RATE TARGETING STRATEGY DOES NOT WORK. THERE IS NO EVIDENCE IT WORKS. CAN YOU EXPLAIN THEORETICALLY WHY IT SHOULD WORK? WE CAN DISCUSS YOUR THEORY ON THAT. ALSO, PLEASE EXPLAIN TO ME WHY WE SHOULD EVEN CONSIDER A "CORE COMMODITY PRICE INDEX TARGET" WHEN A GOLD TARGET IS CLEARLY PREFERABLE -- IN THAT IT IS THE MOST MONETARY OF ALL COMMODITIES, IT'S "STOCK" THE LARGEST RELATIVE TO ITS "FLOW" -- AS GREENSPAN EXPLAINED WHEN ASKED WHY GOLD IS PREFERABLE. WHEN THE WORLD ABANDONED BI-METALLISM IN 1873, IT WAS CLEAR THE MARKETS PREFERRED ONE COMMODITY MONEY AND IT WAS GOLD. YOU NOW SEEM TO BE PROMOTING TRI-METALLISM OR MORE. WHY?
I, again, and consistently, say that the correct price of gold consistent with price stability is different after a country has permanently adopted an automatic gold standard than that which is consistent with a transition to zero inflation as a prelude to a commodity standard.
THIS IS AN ANGELL ASSERTION BASED ON WHAT THEORY? UNLESS YOU CAN SUPPLY ME WITH A THEORY, I HAVE TO ASSUME YOU HAVE SIMPLY COME UPON THIS VIEW IN ORDER TO SUPPORT YOUR PERSONAL BEHAVIOR AS THE GOLD PRICE HAS FLUCTUATED. AD HOC ANGELLISM.
MY ASSERTION IS THAT WHEN ANY COUNTRY GOES "OFF GOLD," ALLOWING ITS STANDARD OF VALUE TO FLUCTUATE UP AND DOWN AGAINST THE VALUE OF GOLD, THE MARKET PUNISHES EITHER CREDITORS OR DEBTORS, GIVING CREDITORS A WINDFALL GAIN WHEN THE PRICE OF GOLD FALLS -- AT THE EXPENSE OF DEBTORS, GIVING DEBTORS A WINDFALL GAIN WHEN THE PRICE OF GOLD RISES -- AT THE EXPENSE OF CREDITORS. IN EITHER CASE THERE IS A SUBTRACTION FROM THE AN OPTIMUM EFFICIENCY -- THE CONDITION WHICH PERMITS TRANSACTIONS TO BE MADE ACROSS TIME WITH NEITHER SIDE OF THE EXCHANGE BURDENED WITH A MONETARY RISK.
To guess on the correct price of gold while running an inflation rate of around 2 percent runs the risk of an adjustment of the price level to be consistent with that price of gold.
YOU ARE ON RECORD AS QUESTIONNING THE INFLATION RATE ITSELF, AS IT IS ASSEMBLED BY THE BLS. WHICH "INFLATION" RATE DO YOU USE WHEN YOU SAY "2 PERCENT," AND DO YOU CONSIDER IT IS CORRECTLY ASSEMBLED?
I have not been willing to take the risk of the price level adjustment which would most likely have an undesirable business cycle component. Consequently I have always preferred to use the price of gold as a monetary policy indicator along with a core commodity index and the exchange value of the dollar.
We seem to be far apart on this issue.
AGAIN, I DONT UNDERSTAND WHAT "RISKS" YOU ARE TALKING ABOUT WHEN THE WORLD ECONOMY IS FRAUGHT WITH RISKS IN A GREENBACK WORLD. THE EARNINGS COMING IN NOW ARE REFLECTING THE GLOBAL DEFLATION THAT COULD HAVE BEEN HALTED IF THE FED WERE SUPPLYING LIQUIDITY DEMANDED WHEN GOLD WAS AT $350 OR $325 OR $300. OR DO YOU NOT ACKNOWLEDGE ERROR BY GREENSPAN ON THAT ACCOUNT?
Other than in late 1986 and early 1987 when we were in agreement that the Fed was supplying liquidity at a faster rate than was consistent with price stability, it has seemed to me that you were never in accord with more monetary policy restraint which could be consistent with zero inflation.
WHAT ARE YOU TALKING ABOUT? YOU KNOW I NEVER, EVER DIVERTED FROM $350 GOLD, FROM THE DAY I MET YOU IN EARLY '85 TO THE DAY YOU LEFT THE FED. WE HAD DOZENS OF HOURS OF CONVERSATIONS IN WHICH I THOUGHT WE AGREED THAT IT WAS MORE IMPORTANT TO KEEP THE GOLD PRICE CONSTANT AS A UNIT OF ACCOUNT THAN TO SQUEEZE THE CPI DOWN BY FOSTERING AN ECONOMIC SLOWDOWN. MY RECORD IS NOT ONLY CLEAR ON THAT. IT WAS A BROKEN RECORD THAT PLAYED OVER AND OVER THROUGH ALL THOSE YEARS. IT WAS ONLY AFTER YOU LEFT THE FED THAT YOU WATERED DOWN THE ANALYTICAL MODEL WE HAD AGREED UPON, TO THE POINT WHERE YOU MIGHT HAS WELL HAVE BEEN A FRIEDMANITE.
I just do not understand your sword rattling over your being right and my quitting the engagement because I was wrong. Jude, I correctly suggested that tight money would produce lower inflation and faster growth. You kept suggesting that we would run into a recession. It did not happen.
WE HAD A WORLDWIDE DEFLATION THAT WRECKED THE ECONOMIES THAT SUPPORT BILLIONS OF PEOPLE. GREENSPAN WOULD NOT TALK TO ME AFTER SEPT 1987 WHEN I ASKED HIM TO CONSIDER HIS RESPONSIBILITIES TO THE WORLD... AS OUR DEFLATION WAS CAUSED BY THE TAX CUTS OF 1997, WHICH INCREASED THE DEMAND FOR LIQUIDITY WHICH THE FED REFUSED TO SUPPLY. REGARDING SABERS, I'VE ONLY ASKED IF YOU WERE PREPARED TO ENTER A DISCUSSION WHERE WE COULD REACH A CONCLUSION, EVEN IF IT MEANT YOU HAD TO ADMIT YOU WERE WRONG. IN THE PAST, WHEN OUR DISCUSSION LED TO A POINT WHERE YOU SAW I WOULD WIN THE ARGUMENT, YOU HAD TO TAKE ANOTHER PHONE CALL. I'VE ALWAYS HAD TO ADMIT ERROR WHEN I WAS WRONG, WHICH IS WHY I HAVE LEARNED SO MUCH FROM OTHER PEOPLE WHO HAD BETTER ANSWERS THAN I HAD.
If you and I can come together for a new beginning when even I believe the Fed is too tight then we might find some common ground for exploring the direction of monetary policy going forward. I am open to talking about the future. I see little benefit from going over all that old ground that seems to suggest we were in different worlds. I have been equally guilty re. the old disputes.
What new issues for policy and suggestions of policy makers would you suggest? I called today to open up that possibility.
IT IS CRITICAL THAT WE BEGIN TO MAKE THE CASE THAT MUNDELL HAS BEEN MAKING IN THE WSJ, THAT THE TIME IS RIPE FOR A NEW INTERNATIONAL MONETARY SYSTEM... ONE THAT LINKS THE DOLLAR, THE EURO AND THE YEN TO GOLD. IF ENOUGH OF US MAKE THAT CASE... SUPPORTING OUR NOBEL PRIZEWINNER... AND CHOOSE A GOLD PRICE THAT DOES NOT REQUIRE WE DEFLATE TO $265, SAY $300, WE COULD CATCH THE TIDE JUST WHEN THE WORLD IS SICK OF FLOATING CURRENCIES. WHEN BARTLEY GETS DIVIDED COUNSEL, HE BACKS AWAY COMPLETELY. IF WE COULD ALL GET IN BACK OF MUNDELL, THE MOST POWERFUL PIECE ON OUR CHESSBOARD, WE COULD DO THE TRICK. MUNDELL HAS ALWAYS SAID IT IS MORE IMPORTANT TO PICK A REASONABLE GOLD PRICE AND DO IT!! AND NOT ENGAGE IN ENDLESS DEBATES ON WHETHER IT SHOULD BE A BIT HIGHER OR A BIG LOWER. THE WORLD OPERATES BEST WHEN THERE IS ONE MEASURING ROD FOR TRANSACTIONS AND CONTRACTS AND INTELLECTUAL AGREEMENT ON HOW IT SHOULD BE MAINTAINED.
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