The Agenda

Ramesh Ponnuru on the Virtues of Loose Money, and J.P. Morgan on Prospects for Savers

Ramesh Ponnuru’s latest Bloomberg View column is on the potential of nominal GDP growth targeting to restore the U.S. economy to something resembling good health:


When nominal GDP falls below expectations, people find the burden of their nominal debts — such as mortgages — unexpectedly rising. Uncertainty about the economic outlook increases, and makes consumers and businesses more skittish than they otherwise would be.

Economics professor and blogger David Beckworth suggests that the Fed should abandon interest-rate targeting and instead announce that it will do whatever it takes — from further quantitative easing to throwing money out of a helicopter — to restore nominal GDP to trend.

If markets believe the Fed will follow through, expectations of the future path of nominal spending will adjust upward and that should, in turn, increase nominal spending levels right now. Part of that increase would take the form of an uptick in inflation — which markets currently expect to be extremely low for the next decade — but part of it would also be increased economic activity.

Ending the Fed’s tight-money policies need not punish savers, as is often alleged, because a healthy economic recovery should raise real returns. Conservatives are suspicious of any loosening because they think of it as a government intervention in the free market. But they are wrong. A central bank that keeps the supply of money too low is just as interventionist as one that keeps it too high. [Emphasis added]

This last part reminded me of a recent report from J.P. Morgan, which a correspondent I greatly admire passed on to me. It explicitly addresses the impact of a potential QE3 on savers:

To understand why, consider Mr and Mrs James Rentier (a), an apocryphal family in their early 50’s living in upstate New York.  The Rentiers are middle income: $80,000 in adjusted gross income, 3 children and $300,000 in savings after setting aside 10% of their income over the last 30 years.  Over time, as they aged and given their limited safety net, they shifted their investments into cash and short term fixed income.  The current tax system is friendly to the Rentiers; at their income level, after standard deductions, available child tax credits and the payroll tax holiday, their fully-loaded effective tax rate is around 14.5%.  But now consider the impact of QE (quantitative easing) on this family.   Money market yields, in a normal cycle, are ~ 2% over core inflation; that would be around 3.5% today   Zerophilia deprives this family of ~$8,200 per year in after-tax interest income.  How substantial is that?  Let’s normalize interest rates, and then compute the increase in effective tax rates that results in the same amount of after-tax income the Rentiers have today.  As shown below, the punitive impact of QE on this family is the same as raising effective tax rates by one third.   These are the unintended consequences of QE: a wealth transfer fromsavers to the over-leveraged, and perhaps, to owners of stocks, although this latter channel isn’t working that well.  Note: this is before considering the impact of rising commodity prices on the Rentiers (the Fed rejects the notion that QE affects commodities).

I’m inclined to share Ramesh’s emphasis on the role of a healthy economic recovery in raising real returns, but the case of the rentiers is, I suspect, at the heart of conservative objections to another round of QE. 

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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