Larry Kudlow: Derp No More?

     While Krugman bemoans the untoward effect that the inflationphobia and fear of deficit spending from those in 'Derpistan' have had on the fiscal and monetary debate, he notes that while most even now try to move to a different part of Derpistan, Kudlow is one of the few who may have left altogether.

      The textbook definition of 'derp' is loudly proclaiming things you believe in the face of contrary evidence-according to Noah Smith.

      http://www.theatlantic.com/business/archive/2013/07/the-derp-and-fall-of-inflation-fearmongers/277347/

      Both Krugman and Matt O'Brien point out that no matter how often they're wrong inflation fear-mongers simply move on to a new reason that we're going to get 'galloping inflation.' Originally there was supposed to be a straight line between the Fed expanding its balance sheet, deficit spending, and skyrocketing interest rates and soaring inflation.

     As these things haven't happened they claim that you can't trust the official figures or that they don't give us the 'real inflation rate.' O'Brien also points out how wrong the Austrians have been during the crisis.. Now they were widely credited as predicting the popping of the bubble but they've been useless in their predictions during the bust period. This seems to point to the limits of Austrian Business Cycle Theory (ABCT)-it maybe useful for predicting the popping of a bubble but useless in telling us much about the bust itself once it starts.

     Krugman gives a good overview of Derpistanians. Yes, most are pretty unreconstructable:

     "Middle Derpistan is where most of the country’s inhabitants used to live.It had what looked like highly fertile intellectual soil, easy to cultivate with a few tools taken from the intro textbook: printing money causes inflation! Running deficits drives up interest rates! It’s the 1970s all over again! A lot of people settled in comfortably there circa 2009, and waited for their crops to come in."

     "It turned out, however, that this wasn’t such a good place to settle down after all. Some of us tried to warn them, on both the interest rate and the inflationfront; things aren’t that simple in a liquidity trap. But they didn’t listen; and as inflation and soaring rates kept not coming and not coming, they found themselves like farmers on the Great Plains in the 1930s, watching their chosen ground turn into dust."

     "Despite this, a few oblivious types have refused to move; Michael Kinsley comes to mind. But for the most part, what we’ve seen is emigration. A few, like Larry Kudlow (!!!) have packed their belongings on top of the pickup truck and left Derpistan altogether. Most, however, have migrated only a short distance in or out."

      http://krugman.blogs.nytimes.com/2013/07/06/regions-of-derpistan/

      Yet, it is jarring to realize that Kudlow is one from Derpistan who was able to move on; if he can do it what else is possible? Yet here Kudlow is:

       "All this is to say that the demand for cash and cash equivalence by consumers and banks is so strong in a risk-averse environment that all the Fed has really done is meet those cash demands. It’s not working the printing presses overtime."

      "In fact, the inflation rate during this whole period has been trending around 2 percent or less, far below the expectations of Fed critics (including myself). Over the past year, M2 growth has been about 7.5 percent and M2 velocity has fallen by about 3.5 percent. So the rise in nominal GDP is a historically low 3.5 percent."

      http://www.nationalreview.com/articles/343645/has-bernanke-gotten-story-right-larry-kudlow

      Wow! That's quite an evolution for a guy who I'm not even sure believes in evolution. My take on it is that he has been influenced largely by Sumner and the Market Monetarists-Sumner has recently done his radio show and the National Review Online where Kudlow  writes has let Sumner write editorials.

      "Interestingly, while the inflation rate has remained subdued, so have market-price indicators, such as gold, the dollar, and commodity indexes. The suggestion here is that Bernanke, rather than mounting a high-inflation policy, has been avoiding deflation."

      "At the end of the day, the Federal Reserve is not the engine of growth. Low tax rates, light regulation, and limited government spending create the incentives for more rapid economic expansion and prosperity-inducing opportunities."

      "But if I have this story right, the market monetarists want the central bank to enforce a nominal GDP growth rule, which will avoid both deflation and inflation, and thus give fiscal incentives breathing room for a more rapid job-creating expansion."

    Kudlow is right about the Fed-it has been merely avoiding deflation-as both Market Monetarists and Keynesians have argued.  Sumner argues that the Fed now has an-effective-1% inflation target-without being aware of it. 

     http://www.themoneyillusion.com/?p=21974

     The one thing that Kudlow is getting is that the MMers don't consider Bernanke's current policy optimum. The Fed-most would agree-should do more than simply avoid deflation though it's better than what the Japanese Central Bank did for years-permit deflation. The goal of MMers is to actually increase nominal spending however, not simply to avoid deflation. 

      Overall, though this is proof that while the learning curve is very slow for the inflationistas it is possible to learn something. The MMers may deserve some credit for Kudlow's evolution.