More on QE2

by Ramesh Ponnuru

My endorsement of QE2 is qualified. I’m not convinced by all of the arguments Bernanke has made for it and do not expect it to reduce long-term interest rates. And I’d be much more enthusiastic about QE2 if it were part of a transition by the Fed to a rule-based policy.

The rule that I think makes the most sense is one that stabilizes the growth of nominal GDP. That way the price level could adjust to supply shocks, and the money supply could shift to accommodate changes in the demand for cash. If the growth rate were set as low as I think it should eventually be, that policy would yield long-term declines in the price level. Those commenters and correspondents who accuse me of opposing “sound money” take note: It’s hard to get much sounder than that.

As for the folks who think that inflation is always a terrible deal for savers: They should think again.

In bringing up Friedman and Hayek I do not mean to suggest that we should figure out the correct monetary policy by holding a séance. Assuming I’m right about where their principles point, maybe their principles were wrong, or for some reason do not apply in this situation. But we ought to be careful before leaping to the conclusion that loosening money is an outlandish and unconservative proposal.

One last point for now: Looser money will have the side-effect, which I do not regret, of reducing the value of the dollar against other currencies, at least temporarily. “Competitive devaluation” has a bad name and other countries are already complaining. Let them complain. To refuse ever to take actions that will cause the currency to depreciate is not a strong-dollar policy. It’s a strong-dollar fetish.