“Bitcoin for Dummies” was one of those episodes of The Good Wife that revolves around everyone manipulating everyone else. Unfortunately, since Will is facing the very real prospect of jail time and Eli isn’t in the episode at all, the machinations are grim, without the undertone of playfulness this show often gives even cases involving serious issues. To make up for that, though, we get double Kalinda, as she plays a central role in both the case of the week and in Will’s legal woes.

A lawyer named Dylan Stack, who has Treasury agents literally following him around, comes to Lockhart/Gardner because of Alicia’s past dealings with Treasury. (This show is one of the best around at remembering to let previous cases affect new ones.) The Treasury department is after Stack’s client for supposedly creating a new online currency called bitcoin, and they’re after Stack because he won’t tell them his client’s identity. At first, Will is understandably reluctant to take on a possibly quixotic and high-profile case against the government in the middle of his own tussle with the State’s Attorney, but the representative of the brave new world of virtual money has arrived with piles of cash, and we know that Lockhart/Gardner needs cash. Judge Sobel quickly rules that Stack doesn’t have to give up his client’s identity, but since we’re still in the first half of the episode, that can’t possibly end things, and it doesn’t: Gordon Higgs, the same Treasury lawyer Alicia dealt with a few episodes ago, promptly arrests Stack for being the creator of bitcoin himself.

Perhaps characteristically, Will wants to go on the offense where Alicia and Diane are inclined to defense. They try to argue that bitcoin isn’t a currency at all, so it doesn’t matter whether Stack created it. But after some back and forth, including a fun cameo by CNBC’s Jim Cramer as an expert witness, Sobel rules that bitcoin is a currency, basically because it’s transferable and you can buy things with it on Amazon. I wasn’t entirely convinced – Cramer made some good points about bitcoin not having many of the characteristics of currency, including a central regulating bank, and another witness’s comparison of bitcoin to frequent flier miles seemed apt – but at least this outcome meant we got to spend the rest of the episode watching Kalinda run around a cryptography conference in pursuit of the real inventor of bitcoin.

Kalinda eventually figures out that bitcoin is three people, not one: Stack and his two partners all accuse each other in hopes of leading both Kalinda and the Treasury agents in circles. The most interesting element of this is that one of the partners is a beautiful young blond woman, and Kalinda astutely points out that the woman could use her gender and looks to deflect suspicion: Everyone assumes that the inventor of a revolutionary tech product must be male, and it’s satisfying to see a woman turn this discrimination on its head and use it to her advantage. In the end, though, it doesn’t matter that Kalinda is being manipulated, because she doesn’t need to have the true answer as long as she can play Higgs the way she wants, and no one on this show – with the possible exception of Eli – can manipulate like Kalinda. She sets up (and “accidentally” records) a meeting with Higgs at which she promises to unmask the real inventor of bitcoin, and this proof that Higgs doesn’t really believe that Stack is the inventor leads the judge to dismiss the case. At their last meeting, Alicia tells Stack that she bought one bitcoin, but that it didn’t feel real. Stack responds with unexpected words of wisdom that could be the tagline for the whole show: “Real’s gonna change. Just watch.”

Will’s storyline this episode starts when Wendy Scott-Carr – with Cary and Dana in tow – meets with Will and his lawyer Elsbeth and makes yet another attempt to get information out of Will before actually starting legal proceedings. Will and Elsbeth neatly play her, acting completely cooperative while giving her no information at all. Elsbeth is being weird, of course, but at this point it’s barely remarkable – except to the people who aren’t used to her yet. And I think this is one component of her strength: in addition to her ditziness making people underestimate her legal skills, her bizarre behavior keeps strangers distracted, so they’re automatically at a disadvantage when they negotiate with her or her clients. As the State’s Attorneys leave, Cary can’t resist rubbing it in to Wendy that Elsbeth played her, and so Wendy orders Dana to use her leverage with Kalinda to get something solid. Cary looks sincerely concerned at this turn of events, and I’m left wondering whether Wendy just hasn’t noticed that Cary is one of Kalinda’s few real vulnerabilities, or whether she’s waiting to use that against them later.

Speaking of vulnerabilities, Elsbeth insists that she and Will have a conversation about his, but he claims not to know what they are. (This made me wonder whether Elsbeth knows about his relationship with Alicia yet.) He comes up with one pretty quickly, though: When he quit gambling, his bookie forgave his debt of $8,000; this bookie was a friend and Will later invited him to join his notorious judge-filled basketball games. Will realized that Wendy will paint this as a payoff for introducing the bookie to the judges, and try to find a case that a judge supposedly threw for Will in return. This is exactly what Wendy’s doing, and since everyone knows that Kalinda is basically a investigative superhero, both sides ask her to find the case that would best fit this scenario. She produces a case for Will (who claims that “Sometimes the ball just bounces funny”) and then gives the files to Dana – who is threatening to go after Alicia for fraud (in regard to the possibly forged document from last week) if Kalinda doesn’t help her. Since Kalinda is Kalinda, it’s not at all clear what she’s up to; I think she’s basically on Will’s side, although even that could be questioned. Did she in fact find the most incriminating case, or is she sending both sides in the direction of an accusation that will be easy for Will to refute? Did she doctor the file before she gave it to Dana? And how does the threat to Alicia figure in? Is Kalinda still trying to make up for sleeping with Peter – and to win back one of her few real friendships – by protecting Alicia at Will’s expense? Will doesn’t know about the threat to Alicia, but if he did, he’d probably protect her as well. After years spent coping with the fallout of Peter’s misdeeds, it’s finally something questionable Alicia herself did (since even if she was tricked into it by David, she went along with it in the end) that may have huge ramifications on the futures of the men in her life.

And there’s manipulation on the home front as well, as Alicia hears Zach and his girlfriend Nisa say “I love you” to each other and quietly freaks out about her baby growing up. When she suggests that the young lovebirds slow things down and see a little less of each other, Zach immediately asks if it’s because Nisa is black, hoping that his mother will be so horrified by the suggestion that she’ll bend over backwards to make it clear that it’s not true. Alicia sees through this one immediately: “You know it’s not that, so don’t try to pretend.” But Zach gets a break when, to get out from under Alicia’s supervision, he takes Nisa to Peter’s apartment – where his grandmother is waiting, as apparently she has nothing to do but lurk around hoping to catch other members of the family doing things of which she can disapprove. Zach can barely hide his glee when Jackie expresses concerns about his relationship in almost the same words that Alicia used, and he takes the first opportunity to tell his mom that his grandmother agreed with everything she said. It works, of course: turning into a mother like Jackie is one of Alicia’s biggest fears, so she immediately reverses her position and the restrictions on Zach and Nisa’s relationship are gone.

CBS is airing a repeat next week, so I’ll catch up with you in two weeks, when, if we’re to believe the previews, Wendy will ask Alicia under oath whether she has ever slept with Will. Fun times!

Kate Linnea Welsh is a New Hampshire-based writer and taxonomist. (No, that doesn’t involve dead animals.) She’s a senior editor at TheTelevixen.com, on staff at Vampire-Diaries.net, and writes about other TV shows, books, and more at her blog (http://katelinnea.blogspot.com). She’d love to talk to you on Twitter: @katelinnea

Texas Gov. Rick Perry (R-TX) claimed in a debate that “it is a travesty that young people in America are seeing their dollars devalued.” Mitt Romney also chimed in to say that “people will not invest in this country and create jobs in this country for the American people if they don’t have belief in our currency.” But there’s one big problem with this storyline — it isn’t true:

Moves by the Federal Reserve to flood the world with dollars are doing little to dent the currency’s value, bolstering the appeal of U.S. assets at a time when the government needs the support of foreign investors the most.

The U.S. Dollar Index (DXY) has appreciated 13 percent from a record low in March 2008 even as the Fed kept interest rates at about zero and printed cash to buy $2.3 trillion (FARBAST) of Treasury and mortgage-related bonds, and is little changed since 1991. The International Monetary Fund said Dec. 30 that the greenback’s share of global foreign-exchange reserves rose in the third quarter by the most since 2008.

In fact, it was the George W. Bush administration that “was associated with a large and persistent fall in the value of the dollar.” As the Big Picture’s Barry Ritholz put it, “A fall [in the dollar index] from 121.02 in July 2001 to 70.69 in March 2008 — Now THATS a dollar collapse.” Of course, no Republicans were making headlines screaming about devaluing the currency then.

It’s not only those seeking the presidency that are using this line. As Bloomberg News noted, the dollar’s performance “counters officials in China, Germany and Brazil who said that the Fed’s policies were weakening the dollar. House Speaker John Boehner of Ohio and three other Republicans sent Fed Chairman Ben S. Bernanke a letter in 2010 expressing ‘deep concerns’ about the central bank’s plan to print money to buy bonds, saying it risked weakening the dollar.”

Claiming that he devalued the currency is just one more lie in a host of lies the candidates are propagating regarding Obama’s economic record. But it bears so little resemblance to reality that no candidate who uses it should be taken seriously when it comes to economic policy.

The short-term rates, you see, went up slightly even as long-term rates fell. That’s the twist. It also shows, incidentally, that contrary to some press reports the financial markets weren’t fully expecting action of this scale in advance of the announcement. The whole pre-announcement week saw minor changes in rates going in the other direction. At any rate, as you can see the Fed’s strategy worked and the yield curve is now flatter.

Given that this “worked,” the question is why Ben Bernanke thinks it’ll work. What’s really supposed to happen as a result of this? Non-underwater households will presumably refinance their mortgages at a somewhat greater clip and that’ll put some cash in their pockets. But nothing’s been done here to alter expectations. And why do this rather than QE3? My understanding of the original 1961 Operation Twist is that the idea was to promote capital inflows in order to maintain US gold reserves. The contemporary parallel would involve raising the price of the dollar, which given the size of the trade deficit is totally counterproductive.

In my view, the best model for central bank independence would be our independent Supreme Court. The justices’ decisions are not subject to veto by congress, and the justices don’t stand for election. But the justices are part of the political process, and the power to appoint Supreme Court justices is rightly understood as an important aspect of presidential authority. Candidates for the presidency are required to talk about their approach to judicial appointments, and it’s expected that important judicial decisions will be debated by political figures including incumbent members of congress. That’s not “politicizing” the court, it’s a recognition of the fact that the Supreme Court is an important government institution.

By the same token, the Federal Reserve is an important government institution and the elected officials in the government ought to talk about it.

Most people see that as a sign that Chairman Bernanke has basically decided that he favors additional stimulus and needs a long meeting in order to whip votes and get everyone comfortable with his ideas. And certainly over the past couple of months, I’ve heard more frequently from professional staff that I’m underrating the basic lack of agreement around methods of delivering an economic boost rather than the desirability of doing so. Of the ideas under consideration, the one you ought to be rooting for is Chicago Fed President Charles Evans’ call to explicitly state that the Fed will tolerate a bit of extra inflation until unemployment drops several percentage points. My view (which I should add is by no means widespread among economists) is that such a statement would, on its own, increase real output. But even if it doesn’t, it’s a necessary first step to getting a boost.

I don’t think Kenneth Rogoff’s proposed “Great Contraction” framing device is any better than the “Great Recession” terminology he wants to replace it with. The real moral of his story is that we’re experiencing a Great Deleveraging:

But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation. [...]

For example, governments could facilitate the write-down of mortgages in exchange for a share of any future home-price appreciation. An analogous approach can be done for countries. For example, rich countries’ voters in Europe could perhaps be persuaded to engage in a much larger bailout for Greece (one that is actually big enough to work), in exchange for higher payments in ten to fifteen years if Greek growth outperforms. [...]

In my December 2008 column, I argued that the only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, anyway, as Europe is painfully learning.

Of course we haven’t done that and we haven’t had a quick escape. In the narrowest view, you can say that creditors have succeeded politically in resisting pressure to eat losses. But the cost of that has been lower economy-wide output which ultimately doesn’t help the creditors since you can’t be repaid money if the people who owe you money don’t have it. That said, within the broad class of “creditors” there are diverse interests, each one of which is perfectly rational in trying to avoid pressure to eat losses. But if they’re all successful, you get a negative sum outcome.

Via Paul Krugman, Eugene Fama offers a syllogism on macroeconomic stabilization:

Again, here is my argument in three sentences.

1. Bailouts and stimulus plans must be financed.

2. If the financing takes the form of additional government debt, the added debt displaces other uses of the same funds.

3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.

Are any of these statements incorrect?

In his attack on me Krugman implicitly assumes that sentence 3 above is true; that is, the stimulus plan will on balance move resources from less productive to more productive uses. This is indeed the focus of the issue.

One way to understand what’s wrong with this is to consider the circumstances under which it might be true. Suppose that we were living in the Kingdom of Coneria and “funds” meant “gold coins.” In that case, anything the government does to stimulate the economy requires the acquisition of additional gold coins. You could borrow the gold coins, you could tax the gold coins, you have options, but somehow you’ve got to get the coins. In this case, due to the objective scarcity of coins the only real issue is whether you’re shifting the coins from a low-efficiency use to a high-efficiency one.

But now suppose you swap everyone’s coins for little pieces of paper with the king’s face on them. Just as before, economic actors need a medium of exchange. And just as before, taxes are due. But instead of paying taxes with gold coins, you pay them with little pieces of paper. This makes the pieces of paper commodities worth having, and thus convenient for use as a medium of exchange. Now the king is riding around one day and he notices that 9.1 percent of the population is unemployed. He also sees that there’s a bridge in disrepair. So he prints up some more little pieces of paper, walks over to some unemployed dudes, and says, “I’ll give you some paper if you fix the bridge.” The dudes are short on little pieces of paper, so they jump at the opportunity. This use of pieces of paper doesn’t need to be more efficient than some alternative use of the paper. You just had the paper printed. All that has to happen is that it has to be more efficient for the dudes to be building a bridge than for the to be sitting on the couch scouring the help wanted ads and feeling depressed.

I was pondering Scott Sumner’s argument yesterday that a true inflation-targeting regime from the Federal Reserve would imply extremely small fiscal multipliers. But it’s difficult to get around the fact that this cuts against the stated views of the Fed’s top official as well as all the staff economists I’ve ever heard from:

Federal Reserve Chairman Ben Bernanke warned Congress on Thursday that overzealous cuts to government spending could derail an already fragile recovery and said a U.S. debt default could wreak financial havoc.

“I only ask … as Congress looks at the timing and composition of its changes to the budget, that it does take into account that in the very near term the recovery is still rather fragile, and that sharp and excessive cuts in the very short term would be potentially damaging to that recovery,” Bernanke told members of the Senate Banking Committee.

There are a lot of ways you can reconcile Bernanke’s view with Sumner’s, including by just saying that the Fed isn’t doing inflation targeting. But it sure would be nice to know what the Fed’s own theory is. The ambiguity around this is one of several reasons that I think it would be desirable for the Fed to have a clearer and less ambiguous mandate.

I have genuinely no idea why William Galston thinks the point that the mortgage-debt overhang is playing a huge role in the recession constitutes a “new” theory of the recession. But I’m not peevish, so I’ll just say he’s correct and we should talk about solutions:

It’s time, then, to reexamine our housing policy from the ground up. If employers won’t hire until consumer demand increases, and if demand won’t increase until household balance sheets recover, then policymakers should focus on accelerating that recovery. Here’s a back-of-the envelope calculation: If we need to return the household debt burden to where it stood before the bubble, we can either wait another four or even five years (which is what it would take at the current rate without additional intervention), or we can speed it up by allocating the losses of principal that lenders need to accept and remove from their books. Moving the household debt to disposable income ratio from 118 percent to the pre-bubble 100 percent implies a total debt reduction of roughly $1.5 trillion.

As I said yesterday, doing that might actually end up requiring more “bailouts” of institutions paired with firings of bank managers. Politically speaking, that’s a hard lift.

This is one of several reasons why I believe that the best resolution would be to set a higher Nominal GDP growth target and clarify that the Fed is willing to accommodate Reagan-era levels of inflation if that’s what’s necessary to achieve it. Most mortgage debt, and a decent share of other debt, is denominated in nominal terms, so inflation accommodation would speed the process of getting people out from under debt overhangs. But unlike targeted mortgage relief, it would also help people (like, say, me) who have mortgages but aren’t underwater. Last, such a commitment from the Federal Reserve would also encourage high net wealth individuals and cash-rich firms to reduce their holdings of safe low-yield assets and increase their purchases of real goods and services or riskier private business investments.

I found an enormous amount to like in Alan Blinder’s column on America’s jobs crisis, but this bit on the Federal Reserve is wrong:

Creating jobs costs money—whether it’s via tax cuts or more spending. (The Federal Reserve normally can create jobs without budgetary costs, but with interest rates already near zero it says it’s out of ammunition.) If Congress and the president are fixated on reducing the federal budget deficit to the exclusion of all else, we are not going to make headway. So yes, let’s enact a major deficit reduction program right away, but start the cutbacks only in the future. For now, we need a jobs bill.

One point on this that I find a lot of progressive economists miss is that even if you think there’s nothing the Fed can do to boost job creation, this isn’t something the Fed has ever said. On the contrary, the Fed’s position is that both QE1 and QE2 boosted job creation, they’ve given no reason to think that they think QE3 wouldn’t work, and much of Ben Bernanke’s scholarship is dedicated to the idea that “zero lower bound” does not in fact bind. The Fed isn’t doing more because it doesn’t want to do more. As Bernanke put it in 2002: “A central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition.” What’s more, this seems to me to be obviously correct once you think about it. For one thing, it’s right there in the idea of an accustomed policy rate. A central bank can always force other interest rates lower. What’s more, by shaping inflation expectations, a central bank can push real rates lower. Last, per Blinder, “creating jobs costs money,” but the Fed can manufacture money.

In terms of specific ideas and leaving QE3 aside, perhaps the most overlooked lever in the Fed’s arsenal is the interest on excess bank reserves. Traditionally, the Fed has set a regulatory floor on how much money banks need to hold in reserve. And everyone’s understood that raising the reserve level is contractionary and lowering it is expansionary. And traditionally, if banks want to hold larger reserves than that, they’re allowed to, but they would earn no interest on it. In the fall of 2008, the Fed started paying a small amount of interest on excess reserves. Since that time, bank holdings of excess reserves have skyrocketed. This is contractionary for all the same reasons that a higher required reserve level would be contractionary. The Fed could bring this rate back down to zero or it could follow Sweden’s central bank and set it at a negative level. Either this strategy or a “helicopter drop” strategy seem to me to be absolutely guaranteed to increased nominal spending and thus employment.

Apparently when Paul Ryan went out for dinner and a $350 bottle of wine, his dining companions were some hedge fund jerk and University of Chicago economist John Cochrane. Not coincidentally, Cochrane published a paper relatively recently (PDF) that offers a novel model of fiscal and monetary policy in a recession that has the convenient property of affirming all of Rep Ryan’s political views. In particular, Cochrane argues that contra everyone on the Krugman-Bernanke axis, it’s simply not possible for either fiscal or monetary authorities to halt a deflationary trend. And he also argues that it’s not necessary to attempt to do so. And he warns that not only is it plausible to think that runaway inflation is right around the corner even though there’s no evidence of elevated inflation expectations, he argues that runaway inflation is likely to be sparked by tax increases and can best be combatted by gutting Social Security and Medicare.

Here’s a slice from the conclusion of his piece:

Will we get deflation? The fiscal analysis [i.e., Cochrane's mode] suggests that if discount rates for government debt fall, and demand for that debt rises, in additional “flight to quality,” there may be very little that the Fed or even the government as a whole can do about it. However, the fear of a “deflationary spiral” comes from a view that deflation is caused by gaps, and gaps by real interest rates. The fiscal analysis denies this channel, so there is no fear of such a self-fulfilling “spiral.”

Will we get inflation? The scenario leading to inflation starts with poor growth, possibly reinforced by to larger government distortions, higher tax rates, and policy uncertainty. Lower growth is the single most important negative influence on the Federal budget. Then, the government may have to make good on its many credit guarantees. A wave of sovereign (Greece), semi-sovereign (California) and private (pension funds, mortgages) bailouts may pave the way. A failure to resolve entitlement programs that everyone sees lead to unsustainable deficits will not help.

When investors see that path coming, they will quite suddenly try to sell government debt and dollar-denominated debt. We will see a rise in interest rates, reflecting expected inflation and a higher risk premium for U.S. government debt. The higher risk premium will exacerbate the inflationary decline in demand for U.S. debt. A substantial inflation will follow—and likely a “stagflation” not inflation associated with a boom. The interest rate rise and inflation can come long before the worst of the deficits and any monetization materialize. As with all forward-looking economics, no obvious piece of news will trigger these events. Officials may rail at “markets” and “speculators”. Economists and the Fed may scratch their heads at the sudden “loss of anchoring” or “Phillips curve shift”.

I obviously don’t have the technical chops to wrangle with Cochrane’s model in detail. I’ll note, however, that you might be a freshwater economist if you think it makes sense to reassure us that a deflationary spiral is impossible because your model says so even though deflationary spirals do, in fact, occur in human history. To me, a model that denies the possibility of something happening that does, in fact, happen indicates that you’re working with a flawed model. I also don’t understand what’s happened here to the traditional analysis of currency depreciation in a depressed open economy. If investors sell dollar-denominated debt, that means the global price of American-made real goods and services will decline. That means America’s output of real goods and services will go up. This might well be associated with a higher level of inflation by why “stag”? I also wonder to what extent was Cochrane trying to sell Ryan on his zero inflation idea.

One element of sympathy I do have to offer to American policymakers is that they’re operating in a global economy featuring many other actors who appear to have completely taken leave of their senses. The European Central Bank, for example, is engaging in its second interest rate increase of the year even though — smug Germans aside — Eurozone unemployment is at 9.9 percent.

Not only would loose money be good for real growth in the Eurozone’s depressed economies, a bit of elevated inflation would make the kind of sovereign debt issues they’re dealing with much easier to solve. Last, if you think about the problem of divergence between the low unemployment German-led “core” block and the high unemployment periphery, it seems to me that persistent labor shortages in the “core” are exactly what’s needed. That should either induce migration from Spain, Portugal, etc. northward to where the jobs are or else induce core-based firms to find ways to shift some production to the periphery. Obviously, that’s not an ideal strategy, but the ideal strategy would have been for these different countries with weakly integrated labor markets not to have yoked themselves together in the first place.

The stated reason for this policy makes very little sense to be. Allegedly, Ben Bernanke started paying interest on excess reserves in order to signal that in the future he might pay even more interest on excess reserves in order to soak up excess liquidity in case we end up with an inflation problem. But why does he need to pay a small amount of interest now in order to be able to pay a large amount of interest later? The underlying point of the interest on excess reserves policy is that such interest payments are contractionary. And at the moment the Fed is supposed to be engaging in expansionary policy. Why not go back to the long-settled tradition of paying zero percent interest? Why not pay attention to Sweden’s success in setting this as a negative number? Alternatively, if the view is that a giant increase in bank reserves is desirable (it makes the system safer, whatever) why not raise the required reserve level?

These concerns are baseless. As Matt Yglesias points out, the Obama years have seen the lowest inflation in 30 years, but Tea Party groups are determined to make returning to the gold standard a litmus test for GOP presidential candidates. And it looks like they’re succeeding. The Daily Caller reports that at least six Republican contenders are scheduled to speak at a pro-gold standard bus tour in Iowa:

The Iowa Tea Party and the group American Principles in Action announced that they are launching their 18-day bus tour starting June 13.

Republicans Michele Bachmann, Herman Cain, Newt Gingrich, Gary Johnson, Tim Pawlenty and Rick Santorum are scheduled to speak during at least one stop on the tour, according to Andy Blom, executive director of American Principles in Action. All are either running or contemplating a run for president in 2012. [...]

“We’re facing dramatic inflation and we have a government with out of control spending,” Blom said. “If we go back to making our money actually worth something, it stabilizes prices, it takes away the government’s credit card, they can’t just decide to go print tons of money and devalue the dollar.”

Blom said they also hope to get the grassroots, populist support behind the issue.

Nevertheless, Republican candidates have increasingly pandered to the far-right base by endorsing these gold schemes. Former Minnesota Gov. Tim Pawlenty (R) recently derided the U.S. dollar as a “fiat currency” — a dog whistle to “a narrow constituency of voters who believe that America’s woes began when it abandoned the gold standard.”

The problem, as we’ve seen before, is that a review of 30 years of inflation history makes it clear that Reagan-era policies featured much higher inflation than Obama-era ones:

Now by my lights, this is a perfectly good idea. A wide range of economists from Paul Krugman, Olivier Blanchard, and Mark Thoma on the left to Greg Mankiw, Tyler Cowen, and Scott Sumner on the right think that setting a 4 percent inflation target will stimulate real output and reduce unemployment. Indeed, Federal Reserve Chairman Ben Bernanke himself agrees that this would work, but refuses to do it anyway. Under the circumstances, political pressure for a return to “Reagan-era monetary policy” could do a lot of good.

Conversely, if by “Reagan-era monetary policy” Gingrich means that we need to stop “runaway inflation” then of course the question is what runaway inflation is he talking about. Inflation is much lower than it was during the late Reagan years, and wildly lower than it was when Reagan took office.

In his speech today about the economic outlook, Federal Reserve Chairman (and former George W Bush Council of Economic Advisors Chairman) Ben Bernanke warned that although closing the long-term budget gap is important, policymakers should avoid counterproductive near-term austerity budgeting of the sort that’s failed in the United Kingdom. Specifically, Bernanke cautioned that “a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery.”

Bernanke also rebutted the growing chorus of hard money fanatics (including Rick Santorum, Paul Ryan, and Tim Pawlenty) who’ve taken to accusing Barack Obama of a devious plot to “debase” the currency:

Slow growth in the United States and a persistent trade deficit are additional, more fundamental sources of recent declines in the dollar’s value; in particular, as the United States is a major oil importer, any geopolitical or other shock that increases the global price of oil will worsen our trade balance and economic outlook, which tends to depress the dollar. In this case, the direction of causality runs from commodity prices to the dollar rather than the other way around.

Bernanke’s comments were disappointing in that he promised no new monetary stimulus for the economy despite high unemployment and what he conceded to be a bleak economic outlook. Still, his remarks on fiscal policy and exchange rates—coming from a man who counted as a conservative economist in good standing just a couple of years ago—are an important reminder of how far out of the mainstream the American right has swung since the 2008 election.

As my colleague Travis Waldron has previously reported, Jon Huntsman has an encouragingly reasonable record especially for someone who was governor of such a conservative state as Utah. Given that the US-China relationship isn’t a super-ideological matter and that US policy in East Asia is in general somewhat insulated from partisan politics, this sort of record seemed to make him a strong choice to serve as Barack Obama’s ambassador to Beijing. But as a GOP presidential primary candidate, this record’s left him with a dangerous Wingnut Gap that makes him unsuited for the current temper. But speaking this morning with George Stephanopoulos, Huntsman sought to close that gap, adopting new and wrongheaded positions on fiscal stimulus, embracing repeal of the Affordable Care Act, and going all-in on the House GOP Medicare repeal plan.

But even better, he opened a fresh front in wingnuttery by linking his desire to eliminate Medicare to some crank thinking on monetary policy issues:

Jon Huntsman: I would’ve voted for it.

George Stephanopoulos: Including the Medicare provisions?

Jon Huntsman: Including the Medicare provisions. Because the only thing that scares me more than that is the trajectory that our debt is taking. And the trajectory that our debt is taking now beyond $14 trillion is going to have an impact on our currency. It goes south, and our currency’s going to have an impact on our standard of living and affect every family in this country, and over time, our international competitiveness. So what is really scary I think to me and I think most Americans is our debt. And we’ve got to be bold, and we’ve got to have, I think, proposals on the table that perhaps in years past would’ve been laughed out of the room. And we’ve got to look seriously at them. We don’t have a choice. We’ve hit the wall.

To offer a few more words of praise for Huntsman, it’s important to understand that Rep Paul Ryan (R-WI), main author of the Medicare Repeal initiative, is also a monetary crank. Such crankier is on the rise in the conservative movement, but relatively few of the politicians who’ve embraced Ryan’s proposed elimination of Medicare seem to understand its underlying ideological premises as rigorously as Huntsman does. So good for him. Medicare repealers would often like us to believe that eliminating the program will somehow improve the quality or cost-effectiveness of the health care received by senior citizens. Huntsman, however, correctly says this is an idea that should be “laughed out of the room.”

Instead he’s embraced the also laughable idea that we should eliminate Medicare in order to make foreign-made manufactured goods and international travel cheaper. Does that make sense as a policy priority? On the one hand, we decrease employment in the health care sector while on the other hand we decrease employment in US export and import-competing industries? The causal mechanism here is slightly plausible. If you really wanted to implement a manufacturing-wrecking expensive dollar policy, eliminating could be part of the package. But why would you want to do this?

Ezra Klein wants to abolish the “strong dollar”/”weak dollar” rhetoric, which he thinks unduly biases the process in favor of the strong option. I would suggest that a more accurate depiction of currency tradeoffs is to say that the dollar can get more expensive or it can get cheaper.

In practice, normal people don’t do this very often, but currencies are commodities that you can buy and sell. When the dollar is cheap, people who have Yen or Euros or Reals can get dollars easily which makes them likely to buy things that you can buy with dollars—goods and services that are made in America. Conversely, when the dollar is expensive, people who have dollars can get lots of Yen or Euros which makes it cheaper for us to buy things you can buy with Yen or Euros—goods and services that are made in Europe or Japan.

The two important features about a cheaper dollar as a response to a recession are that everyone has dollars and debts are denominated in dollars. A recession is a blow to the national economy, and it means someone has to take losses. Allocating those losses through explicit labor-management bargaining, explicit legislative bargaining, etc. is a very clumsy and time-consuming effort. A cheaper dollar spreads the losses and does so quickly and immediately. People who are left underpaid in real terms by this process are then in a position to bargaining for higher nominal wages, which is a much less demoralizing scenario than trying to implement nominal wage cuts. What’s more, Americans who owe money typically owe dollars. When the dollar gets cheaper, that reduces the real quantity of goods and services that need to be produced to work off the debt and shortens the span of time until we’re out from under it and can return to normal.

With the United States poised to slam into its debt limit Monday, conservative economists are eyeballing all that gold in Fort Knox. There’s about 147 million ounces of gold parked in the legendary vault. Gold is selling at nearly $1,500 an ounce. That’s many billions of dollars in bullion.

“It’s just sort of sitting there,” said Ron Utt, a senior fellow at the Heritage Foundation. “Given the high price it is now, and the tremendous debt problem we now have, by all means, sell at the peak.”

Here’s another idea. A thought experiment. What if Barack Obama secretly spirited gold bars out of Fort Knox and started giving them to people? What would you do if Obama gave you a gold bar? Well if he gave me a gold bar, I’d sell it. And I’d save some of the money I get, and I’d use some of the money on increasing my purchases of goods and services. And I bet you’d do the same. Sure, some idiosyncratic people might just keep their bar under their bed. Others might sell their bar and save 100 percent of the money they get from the sale. But on average, people who got gold bars would increase their purchases of goods and services. And with more goods and services being purchased, firms would expand operations—giving existing employees more hours and hiring new ones—to meet this increased demand. That would raise workers’ incomes, leading to further increases in demand for goods and services and even more economic activity.

Right?

So if handing out gold bars to random people can boost growth through the channel of getting people to increase their demand for goods and services, then what about handing out money to people?

A day before the Senate Banking Committee is due to vote on Diamond for the third time, the Nebraska senator said he couldn’t back someone who has been so outspoken in favor of more government spending and of the Fed’s easy-credit policies to lift the economy.

“We must be increasingly wary of the threat of inflation, yet the Fed continues to print money with reckless abandon,” [Mike] Johanns [R-Nebraska] said in a statement. He had previously supported Diamond twice on the Senate panel, but opposition from Republicans later prevented a vote on the Senate floor.

Recall my thirty years of inflation history:

You might also be interested in the Cleveland Fed’s historical data about inflation expectations:

Or the fact that inflation is currently set to remain below the Fed’s longtime 2 percent target for over a decade:

I’ll be happy to entertain theories about structural employment from anyone as soon as we turn this situation around. But until then, all signs continue to point to an economy suffering from substantial excess capacity.