Is targeting Nominal GDP (NGDP), which is promoted by market monetarists, a fair way to expand the money supply and level out the business cycle? I have already admitted that watching the path of NGDP is a great tool and leading indicator signaling boom or bust. The concept of NGDP futures is interesting, but fraught with danger.

Clark Anderson/Aquaimages

I am mostly concerned with fairness, regarding NGDP Targeting. I asked this question on a couple of econoblogs:

…Oh, by the way, the big banks did a form of NGDP targeting in rich neighborhoods. They permitted those that defaulted to live there free, so the prices would not crash in those neighborhoods. So, even in crash cities like Reno and Las Vegas, there were people living over 5 years in houses where the mortgage was not being paid.

Of course, the average Joe was not afforded such a break. The banks didn’t care that the prices dropped in his neighborhood because they had big clients ready with credit lines to go in and pay cash at rock bottom prices on thousands of homes. So, they got the houses they wanted back through foreclosure and credit to their wealthy clients.

So, the question is, based on what the big banks did in the above statement, can NGDP targeting possibly be fair?

Looking at the example in the quote above, the banks did not really increase the money supply. It was not actual NGDP targeting. Letting people stay in the houses without paying made it look like the money supply was stable, and that prices were stable.

But this question is important in the light of our failure to establish a rise in interest rates throughout the world. NGDP targeting would most likely be better than the negative rates and cashless society that Sweden is facing. But otherwise, it could cause big problems.

I had one answer granted to me by the NGDP pros, as to fairness, that those working for higher, sticky wages could be hurt, but that the negative effects of NGDP Targeting are unknown. I don’t know if that is a definitive answer. But unknown is just what Wall Street needs, right? Not!