TheMoneyIllusion

A slightly off-center perspective on monetary problems.

Right bias steering and right side deviations

If tight money is defined as below target NGDP, in what sense can below target NGDP be said to be “caused” by tight money? I’ll use an analogy to answer this question.

Imagine a ship crossing the ocean. The goal is to cross in a straight line, but the captain makes occasional mistakes and these result in a wavy path across the sea. Deviations from the straight line are called “right side deviations” and “left side deviations”. They are costly, resulting in excess fuel usage.

Steering mistakes that result in right side deviations are called “right bias steering”, and vice versa. Is there any other way to usefully define steering bias, other than by the evidence of path deviation? You can’t simply look at the steering wheel setting, because it may be turning right or left to offset wind and waves. This may not reflect steering errors.  In most cases, you can only spot biased steering by the results.

However, one can imagine a scenario where the force of waves is so powerful that even turning the steering wheel to the limit is not enough to stay on the desired path. The ship might be “trapped” away from the path by the enormous force of liquid waves pushing against it. Let’s call that situation a . . . oh I don’t know . . . how about a “liquidity trap”.

Now we have two possible causes of right path deviation. There might be right bias steering, and there might be a liquidity trap.

Now assume there are two schools of thought when it comes to steering ships. The pessimists worry that the force of waves may occasionally be so strong that the steering mechanism is unable to maintain the desired path. The pessimists argue that path deviations are caused by multiple forces, and that right side path deviations are especially likely to result from liquidity traps, because the strongest storms tend to push ships to the right.

The optimists believe that ships always have enough engine power for the captain to maintain a straight course if he does his job properly, setting the wheel at a position expected to keep the ship on the desired path. They believe that drunken captains occasionally use the “liquidity trap” theory as an excuse for incompetent steering. They scoff that the only liquidity problem is the liquid contained in the captain’s whiskey bottle.

The optimists believe that 100% of path deviations are caused by biased steering. Because there is no way to identify biased steering other than by observing path deviations, the optimists have become famous for equating biased steering with path deviations. Right side deviations aren’t just caused by right bias steering; they are effectively identical to right bias steering. Not because they are identical in a deep philosophical sense (one is a wheel setting and the other is a path), rather because as a practical matter one always implies the other.

This wasn’t true in the “Golden Age” of sailing, but it is today, especially given the widespread use of powerful modern ship engines built by the Italian firm Fiat, which are more that strong enough to offset any wind and waves.  Indeed some optimists seem to reject the laws of physics, claiming that Fiat engines have virtually infinite power, able to reach hyper-speeds.

The analogies could of course be taken much further.  Right bias steering tends to push a ship into dangerous waters, where liquidity traps are more likely.  This explains why the more competent captains are skeptical that liquidity traps even exist; they almost never see them.  Indeed one famous Australian captain never saw one during his entire 100-year career.

Here’s another analogy.  Pessimists tend to define steering bias in terms of whether the wheel is turned to the left or the right, not in terms of the setting of the wheel relative to what’s needed to keep the ship on course.

Here’s another.  Pessimists occasionally call for tug boats to nudge the ship back on course.  Optimists claim that tugboats are useless, as any competent captain will already be steering the ship back on course, and thus will “offset” the force of the tugboat.

PS.  I don’t know if this post was helpful.  For those who didn’t follow, the straight path across the water is stable NGDP growth, and right side deviation is falling NGDP.  (Left side is excessive NGDP.) Right bias steering is tight money (often associated with the political right), while left bias steering is easy money.

Optimists (i.e. market monetarists) define tight money as falling NGDP, and they also believe that falling NGDP is caused by tight money.  However, they understand that this definition only makes sense if monetary policy has infinite power to influence nominal aggregates.  And that’s only true with Fiat . . . I mean fiat money.

PPS. I suppose “port” and “starboard” deviations would be better, but I don’t want to confuse landlubbers like me.

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