Showing posts from tagged with: Bernie Sanders

Money matters: post-Great Recession reappraisal

Posted by Tim Congdon in Article Archive | 0 comments

Evidence from the  years  of the  Great Recession justify renewed attention to  a broadly defined concept  of the quantity of money  in central  bank  research

money mattersControversy  over the use of monetary aggregates undermined the impact of the monetarist  counter-revolution  of the  1970s and early  1980s. Top central  bankers  accepted  Milton  Friedman's   dictum  "money  matters" was  valid  in some  sense,  but  they were  unsure  exactly  how  and why it mattered. Practical application was elusive when their research departments produced data on half-a-dozen  monetary aggregates.  Which concept  of money was of greatest  importance  -  or at any rate of some relevance - to the determination  of macroeconomic  outcomes? Anthony Harris,  one of the Financial  Times' leading commentators,  compared the quarrel to that between the 'Big-endians'    and 'Little-endians'    about the best way to open a boiled egg in Jonathan  Swift's  Gulliver's  Travels. Some economists  favoured  'broad  money',  which included  all bank deposits  and  occasionally  even  included  liquid  assets  that  had  arisen outside  the  banking   system.    Others  supported   'narrow   money'    -   generally taken  to mean  notes  and coins  in circulation  plus   sight deposits.  The majority of monetary  economists  did not regard the monetary  base (the liabilities  of the central bank) as equivalent  to 'the  quantity  of money'  based on any definition. Instead,  they believed   the change  in the base  influenced  the change  in narrow money  and  hence  affected  expenditure   at  a  further  remove.   However,   some participants  in the debate thought that the monetary  base by itself, regardless  of its role in banks'  creation  of money,  had a significant  bearing  on spending  and the economy.  

Yet another misguided criticism of Quantitative Easing

Posted by Tim Congdon in News Archive | 0 comments

The latest criticism is that Quantitative Easing has been ‘good for the rich’, but ‘bad for investment’. Even the financial advice pages of the broadsheet press seem to be going down this route, which is bizarre given that the readers are mostly rich and ought to appreciate a policy allegedly in their interests. (In the note below I quote some remarks by Merryn Somerset Webb in a 12th  October article in the Financial Times.) The truth is that profits are more volatile than national income, while the equity market (which is ultimately only a capitalization of profit streams) is more volatile than profits. The large fluctuations in equity prices are partly down to changing sentiment, but also critical are wide swings in the rate of growth of the  quantity of money,  particularly in  the  money holdings of  the  financial institutions which specialize in asset selection. (See, for example, my 2005 study for the Institute of Economic Affairs on Money and Asset Prices in Boom and Bust for an analysis.) In the short run (i.e., in the course of one business cycle) changes  in  asset  prices  are  influenced  by  variations  in  the  rate  of money growth. So Quantitative Easing from early 2009 did help the equity market (and in that sense ‘the rich’), but it was also beneficial for demand, output and employment more widely. In the long run changes in the rate of money growth cannot affect anything much on the real side of the economy. (A caveat is that extreme inflation or deflation causes severe economic inefficiency in various ways, and that is why inflation and deflation should be avoided.) The FTSE 100 index is lower today than it was in 1999. Is Quantitative Easing (which began in earnest in March 2009) somehow to be blamed for that? Or should the policy or policy-maker supposedly responsible for the poor post-1999 performance be thanked for keeping share prices down? Indeed, does Ms. Somerset Webb think that any policy which enriches people is, by definition, wicked and evil?  

US recovery accompanied by low/falling inflation

Posted by Tim Congdon in Uncategorised | 0 comments

Four years ago, at the worst point in the Great Recession, several leading American economic gurus said that the Fed’s easy monetary policy risked higher inflation which might imperil the recovery. In some of the early commentaries  from  International  Monetary  Research  (in  the  spring  and summer of 2009), I argued that these gurus – who included the revered Alan Greenspan and Martin Feldstein, a prominent adviser to President Reagan – were seeing ‘ghosts’. I brought together evidence from earlier recoveries to show that the typical US recovery was accompanied by the continuation of low inflation and indeed often by falling inflation. In other words, the macro news tended to be excellent during recoveries, with above-trend growth in output and profits associated with declines in inflation. This sort of macro backdrop usually saw strong gains in equity prices. Monetary policy is nearly always controversial, and the last four years have seen even more bitter and intense controversies than usual. Expansionary open market operations of a traditional kind have been labelled ‘quantitative easing’, and described as ‘unconventional’ and innovatory. Silly rants – such as those from Liam Halligan in his Sunday Telegraph column – have claimed that  by  its  very  nature  QE  (and  regardless  of  the  quantities  and  timing involved) is inflationary, redolent of ‘banana  republics’,  ‘the last refuge  of dying empires’, etc. In fact, QE has barely failed to offset the contractive effect on money growth of tighter bank regulation and officialdom’s determination to raise banks’ capital/asset ratios. Anyhow, the latest American data show that inflation is under good control, and is in fact much lower than in 2007 and 2008. (It is not lower than in 2009 when the price level, not the level of inflation, was falling, and observers were understandably concerned about deflation)  

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