Suppose Scott Sumner or his evil twin took over the Fed. The Fed would try to create expectations of returning nominal GDP back to trend relatively soon. These expectations would hit financial markets before they hit goods markets. They will hit prices before they hit wages. Presumably, the public would sell dollar-denominated bonds to try to get into foreign bonds, commodities, or possibly stocks.

The U.S. dollar depreciates, so that exports grow faster than imports. Maybe nominal interest rates do not rise as rapidly as inflation expectations, so we get an investment bubble somewhere. Overall, demand for output rises, and real wages fall, so labor demand picks up, and we return relatively quickly to full employment. That is if all goes well.

But perhaps all will not go well.

a chorus of Chinese officials and advisers is demanding that China switch reserves into gold or forms of oil. As this anti-dollar revolt gathers momentum worldwide, the US risks losing its “exorbitant privilege” of currency hegemony – to use the term of Charles de Gaulle.

Some possible unintended consequences should the Fed adopt a Sumnerian policy that the markets find credible:

1. The massive shift out of long-term nominal bonds into short-term instruments and commodities causes large financial institutions to go under. Imagine, on top of everything else, large European and American banks having to mark down the value of their long-term bond holdings by 30 percent or more.

2. The commodity boom destabilizes the global economy. Commodity-rich countries grapple with inflation and bubbles, while commodity-poor countries grapple with poverty, famine, and civil war.

3. The loss of confidence in the monetary unit creates problems in financial contracting. Capital suppliers and demanders find it very costly to develop instruments to protect themselves against extreme volatility in relative currency values and inflation rates. Capital investment plummets.