This is my fourth and last Chuck Norris post. I'm getting bored with the metaphor too. But there is something many people missed in my last posts. It's important. Andy Harless explains it in his post. I'm going to explain it my way.
Suppose Chuck Norris keeps on fighting for an NGDP level path target year after year. Suppose year after year you bet that Chuck will lose his fight. Your losses if Chuck eventually wins his fight get bigger and bigger every year, while your gains if he loses his fight stay the same. Eventually you will stop betting against Chuck, even if you think there is only a very small chance he will win next year. If everybody else switches their bet before you switch yours, then Chuck wins his fight, and you lose your bet. So you want to switch your bet just before everybody else switches theirs. So do they. So switch your bet now.
Eventually the US economy will return to normal. Something will turn up, and the economy will escape the liquidity trap. Utterly boring conventional monetary policy will work again. If Chuck is still fighting, because NGDP is below his target level, he would have no difficulty in getting NGDP up as high as he likes to hit his target. Even a skinny kid could do it. But maybe the chances of that happening next year are always small.
The beauty of an NGDP level path target (or a Price level path target) that is growing at (say) 5% per year, is that the longer actual NGDP grows at less than 5%, the bigger the upward jump in NGDP when it finally does hit the target path. If Chuck loses year after year, but eventually wins, the longer it takes him to win the bigger the eventual jump in NGDP.
Suppose, just to keep the math simple, that target and actual NGDP start out the same. Then target NGDP grows at 5%, and actual NGDP grows at 4% as long as Chuck loses his fights. The gap between target GDP and actual GDP is 0% of NGDP originally, 1% of NGDP after 1 year, 2% of NGDP after 2 years, 3% after 3 years, and so on. (OK, I've ignored compounding). Until Chuck eventually wins, and NGDP jumps up to the target level path.
You are trying to forecast next year's NGDP growth. Each year, when you make your investment decision, you are making a bet on what NGDP growth will be for the coming year. Your losses if your forecast is wrong are proportional to the amount by which your forecast is wrong.
If you bet that Chuck will lose his fight, and he loses, you win 1% of NGDP. Same 1% of NGDP again if you make the same bet next year and he loses again. And so on, every year.
If you bet that Chuck will lose his fight, and he wins in the first year, you lose 1% of NGDP. If you make the same bet and he eventually wins in the second year you lose 2% of NGDP. If you make the same bet and he eventually wins in the third year you lose 3% of NGDP. And so on.
Even if you think Chuck has a small chance of winning, how long do you want to keep rolling the dice, betting Chuck will lose again next year? It's even odds the first year; two to one in the second year; three to one in the third year, and so on. The odds get worse and worse every year. Eventually you will stop betting that Chuck will lose.
And remember, if everybody else stops betting against Chuck, Chuck wins, and you have already lost your bet. Because investment decisions based on expected future NGDP have a very big influence on current NGDP. So you want to switch your bet just before everybody else does. And remember that everyone else will also want to switch their bet just before everybody else does too. So better switch your bet immediately.