Consulting by RPM || Free Advice Blog

A Geek’s Geek

I always thought it was cool when people would refer to somebody as “a comedian’s comedian” or, more generally, “a [member of profession X]’s [member of profession X].” It was almost a non-falsifiable statement; if you said, “What are you talking about? That guy’s not funny at all!” the person could just roll his eyes and say, “Billy Crystal would know what I’m talking about.”

Anyway, I have just earned the title in the title of this post. Let me explain: Scott Sumner has been having a meltdown of sorts now that he’s back from vacation and sees that everybody turned into a deflationist in his absence. (The non-board-certified von Pepe and I have been psychoanalyzing Sumner over email.) Arnold Kling decided to have some fun and posted this brain teaser to trap Scott:

Here is a multi-part question for monetary theorists:

Suppose that the ten-year interest rate on Treasuries is now 2.6 percent.

1. What open market operations would you recommend to try to bring this rate down to 2.5 percent as rapidly as possible?

2. What open market operations would you recommend to try to bring this rate up to 10.6 percent as rapidly as possible?

3. If someone were to recommend for both (1) and (2) open-market purchases of short-term Treasuries with high-powered money (not necessarily in the same amounts or over the same time period), could that be the right answer? Explain why or why not.

In the comments I wrote:

Great question Arnold. I think Scott Sumner’s answer would be that Bernanke should enter the GDP futures markets and, in his best impression of Patrick Stewart, say, “Make it so.”

If you don’t think that was geeky…trust me, Steve Urkel would know what I’m talking about.