Quantitative What?
My hero Milton Friedman is more succinct:
Update: The ever cheerful folks at Bankrupting America help explain why many of your friends, relatives and neighbors can’t find jobs. Clue: Nothing the Fed is doing is helping to resolve this problem:
19 Responses to Quantitative What?
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There has recently been a back and forth over the question of whether Milton Friedman would support QEII if he were alive today. Personally I think those arguing that he would have supported it have the better of the argument. Indeed, if you look at Friedman’s Monetary History of the United States, he blames the Great Depression on the Fed’s refusal to use monetary expansion to offset the decline in the supply of money and credit that happened in 1929.
Friedman, as a a leader of the Monetarists, argued that a steady, small expansion of the money supply was the only wise policy, and he warned against efforts by a treasury or central bank to do otherwise. The only difference between Friedman and Bernanke is not policy but the speed of implementation.
As for the first video, Scott Sumner wrote his own dialogue in response, which someone kindly animated for him.
Disagree with you BA. Friedman wanted a steady growth in the monetary supply, and that is clearly not what the Quantitative Easing policy is attempting to accomplish. I believe Metzler is on target in his analysis:
“Friedman’s main message for central banks was to maintain a monetary rule that kept the growth of the money supply constant. In his Newsweek column, “Inflation and Jobs” (Nov. 12, 1979), for example, Friedman emphasized that “unemployment is . . . a side effect of the cure for inflation,” so that if a central bank “cured” unemployment by inflating, it “will have unemployment later.” In other words, don’t try it.
Friedman’s Newsweek column for July 28, 1980 (“Improving Monetary Policy”) came with the unemployment rate rising past 7%. His proposals for improving policy made no mention of using monetary expansion to reduce unemployment. He proposed rules for stable growth to achieve target “dollar levels of monetary aggregates.”
Friedman served on President Reagan’s economic policy advisory board. His memos on monetary policy repeat the themes he made familiar to Newsweek readers and others all over the world. There is not a word suggesting that monetary policy should try to raise the inflation rate in order to reduce the unemployment rate.
This is unsurprising, as he had explained many times in the past that any such reduction would be temporary and last only until people caught on to the higher inflation. At that point, they would demand higher wages and interest rates.
Friedman made an exception to his rule about steady-state monetary policy in case of deflation. When prices fell, as they had during the Great Depression or in Japan in the 1990s, he urged the central bank to increase money growth. I served as one of two honorary advisers to the Bank of Japan in the 1990s. With short-term rates close to zero, I gave the same advice, urging the bank several times to buy long-term bonds or foreign exchange to increase money growth until deflation ended.
All this is not relevant now, since there is no sign of deflation in the United States. The Fed’s claim that there is a risk of deflation should embarrass it. …”
http://raymondpronk.wordpress.com/2010/11/08/milton-friedman-on-printing-money-or-quantitative-easing-to-increase-inflation-and-reduce-unemployment-absolutely-not/
In regard to the Great Depression it is certainly true that Friedman believed the Fed should have acted to increase the monetary supply in order to halt bank crashes. That is far different from what is taking place now.
What could go wrong!
Full speed ahead!!
BA: The Great Depression (G-D) Fed SHRANK (or allowed it to happen) the Money Supply (whatever ‘measure’ you believe in) by one-third because it thought that was what was needed.
Just another wrong turn.
Hoover raised taxes.
The Congress passed trade war legislation. The rest is history.
Today, Prof Bernanke, et al think again running the $$$$$$$ printing press is needed.
Obama wants to raise (evil rich/class war) taxes.
Hopefully, Congrss won’t declare war on foreign trade.
The $1.25 trillion MBS buys DID NOT work. Three trillion $$$$$ in deficits did not work.
The economy is moribund b/c of uncertainty: over-regulation, politicization, escalating care mandate costs, financial deform, cap and trade/energy expense increase threat, etc., etc.
The Federal Reserve is acting to increase the monetary base. The money supply is a function of the monetary base but is not identified with it. If you check the figures published by the Federal Reserve, the supply of m1 (cash + demand deposits) and m2 (m1+ time deposits &c.) has seen annual rates of increase in the low single digits in spite of rapid expansion in the monetary base over the last two years and change. He has not actually been violating Dr. Friedman’s prescription. Sir Alan Walters was 25 years ago an advocate of an annual fixed expansion of the monetary base, but he qualified that by saying you needed a manual override to maintain m1 in conditions of liquidity crisis as happened in 1931 (“when there’s a run on your currency, print notes and stuff ‘em down their throats”).
The money supply in its various measures (m1 and m2 &c) was in rapid decline after October 1929 because people’s propensity to hold cash balances was increasing at a considerable clip and the monetary base was stable. The Federal Reserve was reluctant to attempt open market operations like the one’s Dr. Bernanke has been undergoing (although it eventually did) for fear the effects would be neutralized by international gold flows.
Have I been put on moderation?
The Federal Reserve is acting to increase the monetary base. The money supply is a function of the monetary base but is not identified with it. If you check the figures published by the Federal Reserve, the supply of m1 (cash + demand deposits) and m2 (m1+ time deposits &c.) has seen annual rates of increase in the low single digits in spite of rapid expansion in the monetary base over the last two years and change. He has not actually been violating Dr. Friedman’s prescription. Sir Alan Walters was 25 years ago an advocate of an annual fixed expansion of the monetary base, but he qualified that by saying you needed a manual override to maintain m1 in conditions of liquidity crisis as happened in 1931 (“when there’s a run on your currency, print notes and stuff ‘em down their throats”).
The money supply in its various measures (m1 and m2 &c) was in rapid decline after October 1929 because people’s propensity to hold cash balances was increasing at a considerable clip and the monetary base was stable. The Federal Reserve was reluctant to attempt open market operations like the one’s Dr. Bernanke has been undergoing (although it eventually did) for fear the effects would be neutralized by international gold flows.
Trying to decide how much of an evil tool (usury) to use in order to get a good result is ridiculous. The Fed CANNOT make things better and it was never designed to do so. It has one purpose: to rob everyone of material wealth for the sake of a very few and in that process to eliminate sovereignty and consolidate power. It is a tool of enslavement.
We are falling for a Machiavellian trap when we are engaged in a debate of whether the Fed should increase or shrink the money supply, by how much, at what pace – all distractions. The consideration should be do we allow a small group of trans-national financiers and warmongers to control the fate of this country and the world, or do we return power over money to the people’s House and the (what should be the States’) Senate?
Economics is necessarily political and politics is necessarily a moral question – the Fed is absolutely immoral. It is past time to overturn the tables of the moneychangers.
Have you all put me on moderation? My comments are being eaten.
I sure hope not, Art. Goodness knows this thread commentary could benefit from some “moderation” right about now.
If your comment is eaten, it is generally a spam filter issue and not moderation.
Art, you are not on moderation. Your comments got into the spam file for some reason and I have retrieved them. Now back to the law mines for me.
I accede to superior logic.
Monetary Base (data FRB St. Louis) and employment growth??
July 2006 $835 billion (height of the unprecedneted housing bubble)
July 2007 855
July 2008 873
Dec. 2008 1,691
Dec. 2009 1,994
yesterday 1,919
after QE2 ?? 2,500??
Seems it (MB nearly doubled) didn’t work in 2008 and no inflation (cheers in the background). Nor, in 2009. Nor, in 2010. Now, make it a 32% increase.
What could happen?
It’s worth a try.
Full speed ahead!
The $1.25 trillion MBS buys DID NOT work.
Did not work toward what end? The economy has had stable prices for two years. Considering that we were suffering serious deflation in the fall of 2008, I would say their policy has been successful.
I guess my comment, yesterday afternoon, with the various levels of the monetary base (MB) got lost.
Well, in the height of the housing price run-up (June 2006), the MB was $850 billion. By end 2009, it was $1,800 billion. Currently, it’s $1,918 billion. With QE2 it will, I imagine, go to about $2,500 billion.
Art Deco: Serious deflation!
Are you a university economics professor? Usually, only intellectuals come up with such comments.
Serious deflation: In 2009, the price of a house in Merced, CA falls from $300,000 (MB = $850B) to $150,000 (it’s price in 2004; MB $1,900B) . That is not deflation. That is the unexpected (not me, I saw it coming) bursting of an unprecedented housing bubble. But, it is a serious problem in that the mortgage balance owing on that $150,000 house was $300,000.
Got to run. I have to bring the good news about troubled debt restructures to a bunch of weenies.
I dug your comment out from the Spam file T Shaw. It seems like the Spam filter could use some tweaking since it seems to be “eating” non-Spam comments more than it did before the change over.
T. Shaw, the decline in the Consumer Price Index recorded in November 2008 was consistent with an annual rate of decline of 17%. We were suffering serious deflation. Asset prices are not included in the Consumer Price Index. With regard to assets, housing prices stabilized at a level somewhat above the long-term trend in the Spring of 2009, so those have not been deflating either. Equity prices hit their trough in March of 2009.
The rap on quantitative easing is that its end result is likely to be inflationary. My suggestion to you is that in the peculiar circumstances in which we find ourselves, it has not been and it is reasonable to conjecture will not be. (One might also point out that some inflation would be beneficial to the economy).
Your complaint seems to be that everything the Federal Reserve is contemptible, which encompasses a denunciation of the Fed for quantitative easing (Sept. 2008 to the present) and for allowing the money supply to fall (Oct. 1929 to March 1933). Whatever.
Friedman wanted a steady growth in the monetary supply, and that is clearly not what the Quantitative Easing policy is attempting to accomplish.
Friedman’s views were a bit more nuanced. For example, he thought that “to keep prices stable, the Fed must see to it that the quantity of money changes in such a way as to offset movements in velocity and output.” If velocity falls sharply then monetary expansion is needed to offset this.
The Fed’s inflation target is 2%. Before QEII, five year inflation expectations were 1.2%. After QEII this rose to 1.7%. So it seems to me that QEII is aimed at accomplishing precisely what Friedman wanted.