Lunchtime Must-Read: Ryan Avent on Doug Campbell, Ju Hyun Pyun, and the Strong Dollar Policy

Ryan Avent: Secular Stagnation: Glut Busters: “A particular view about the macroeconomics of the pre-crisis period seems to be coalescing….

Since we haven’t solved the underlying savings glut, the American economy now has three options, according to this view:

• Suffer through the same low growth (“secular stagnation”) that was characteristic of the early 2000s.
• Use monetary policy to raise demand through higher asset prices and credit growth, restoring decent growth but creating a risk of new bubbles.
• Use deficit-financed fiscal policy to absorb excess savings and boost demand, without relying on rapid growth in private credit.

Certainly, parts of this story are correct. But is this really the best way to describe what was taking place?… One might… argue that the problem in the 2000s was not that the Fed haplessly created a bubble in order get the economy going again…. The problem was that it… ought to have done… was intervene aggressively in foreign-exchange markets to dampen the dollar’s rapid appreciation…. Doug Campbell… [and] Ju Hyun Pyun…. Now obviously, direct intervention in foreign-exchange markets is not the sort of thing America is supposed to do…. But this is a taboo that needs rethinking. Depreciations have historically been the most effective way to lift expectations for growth and inflation….

The Fed will not do any of the above autonomously. The decision to change the global monetary system will be political, just as it was in 1933 and in 1971, when American presidents made the necessary policy shift. Such decisions only tend to be made when the status quo is clearly untenable or when large political majorities demand a different course. Unfortunately, America’s secular stagnation mess does not seem likely to test either limit for some time to come.