Was money easy or tight during the Great Depression?

Joe Gagnon (and Michael Darda) sent me a paper from the Dallas Fed written by William White:

The central banks of the advanced market economies (AME’s) have embarked upon one of the greatest economic experiments of all time‐ultra easy monetary policy. In the aftermath of the economic and financial crisis which began in the summer of 2007, they lowered policy rates effectively to the zero lower bound (ZLB). In addition, they took various actions which not only caused their balance sheets to swell enormously, but also increased the riskiness of the assets they chose to purchase. Their actions also had the effect of putting downward pressure on their exchange rates against the currencies of Emerging Market Economies (EME’s). Since virtually all  EME’s tended to resist this pressure, their foreign exchange reserves rose to record levels, helping to lower long term rates in AME’s as well. Moreover, domestic monetary conditions in  the EMEs were eased as well. The size and global scope of these discretionary policies makes  them historically unprecedented. Even during the Great Depression of the 1930’s, policy rates  and longer term rates in the most affected countries (like the US) were never reduced to such  low levels .

There’s plenty to object to in White’s call for tighter money, but I’d like to focus on a peculiar trend in macroeconomics, the bizarre equation of “ultra-easy money” with low interest rates and a bloated monetary base.  Until 2008 the standard view of macroeconomists was that money was ultra-tight during the 1930s, despite the very low rates and the bloated Fed balance sheet.  White is clearly familiar with the stylized facts of the Depression, and almost undoubtedly has read Friedman and Schwartz’s explanation of why money was very tight.  But he seems to reject that claim.  In his view money was easy during the Depression (low rates) and is even easier today. 

Why has the Friedman and Schwartz view been rejected by White?  And why was it rejected by John Cochrane, who made a similar claim a few weeks back?  And why has it been rejected by Bernanke, who endorsed the F&S view as recently as 2003?  Bernanke also claims current policy is accommodative, despite the slowest growth in M*V over the past 4 years since Herbert Hoover was President.  You can explain away Bernanke’s comments, as he’s a government official.  But why have roughly 99% of macroeconomists completely flip-flopped from 2008, when money was almost universally viewed as being ultra-tight during the 1930s?  So much so that Friedman and Schwartz’s interpretation had worked it’s way into undergraduate textbooks.  Why do they now think low rates and a bloated base mean easy money?

If the profession as a whole is unable to understand the highly contractionary nature of current policy, is it any surprise that they are having trouble coming up with remedies for our current demand shortfall?

BTW,  Joe Gagnon had similar objections, and allowed me to reprint some comments from his email:

Milton Friedman warned against confusing the level of interest rates with the stance of monetary policy.  Friedman pointed to the growth rate of M2 as the ultimate indicator of monetary policy, but I think his closest modern heirs (and I) would prefer the growth rate of nominal GDP.  Keeping nominal GDP on a steady growth track is the best we can hope from monetary policy.  Nominal GDP growth has trended downward since the 1980s and is low right now.  I conclude that monetary policy is somewhat too tight.

The trend decline in the real interest rate is driven by an aging population (less demand for capital) in advanced economies plus the massive wall of official capital flowing out of the developing economies.  Both of these tend to drive down the equilibrium real rate of interest in the advanced economies.

In previous posts I’ve also argued that long term real rates are on a downward trend due to demographics and high East Asian savings rates.

PS.  Lars Christensen has a very good post showing that the central bank of New Zealand has essentially endorsed the (unfortunately named) “Sumner Critique.”  They aim to prevent fiscal policy from impacting AD.  He also links to  Nick Rowe paper on this topic published back in the 1990s.

PPS.  Mark Sadowski sent a link showing that Bloomberg.com has officially endorsed NGDP targeting.  The momentum builds.


PPPS.  An unrepentent Christopher Balding has replied to my demolition of the “50 percent of Beijing apartments are vacant” story.  He repeats the absurd claim that 50% of Beijing apartments are empty.   Just stop to think for a moment, there are 20 million people in Beijing–does he think there’s enough housing for 40 million?  People need to use common sense.  His evidence?  Some unnamed people looked in a few windows at night to see if the lights were on.  Well there you are!!  Beijing has 20 million people, but there is enough housing for 40 million.  As I type this it is 9:30pm in Beijing.  I’m in a big apartment complex with about 700 units.  In a typical west-side Beijing neighborhood.   I can look out the window and see other buildings in the same complex.  About half the lights are on.  So is Balding right?  The owner tells me that the complex is virtually 100% occupied.  But what would she know, she’s only lived in the area for 50 years.

His evidence that China has a high cost of living (which goes against common sense, and every published study of PPP that I have ever seen), relies partly on inspecting a few grocery items in Shenzhen.  That’s right, the Shenzhan that is China’s most important SEZ.  The one that’s probably the richest city in mainland China.  I’m sure if he lived in Palo Alto he’d tell us that the US had a high cost of living.  I see that commenters have poked lots of other holes in his post. 

Unlike Balding, I’ve never shopped at a Chinese Carrefour (a French chain), rather I go to supermarkets where ordinary Chinese shop.  And with a few exceptions (such as dairy) the prices in China are lower.  Commenters “Nick” and “Sean” provide the goods.

Balding also claimed this:

Despite all evidence to the contrary, Prof. Sumner is saying as an economy, there is no bad investment in China

When bloggers make up those sorts of fibs it tells you pretty much all you need to know about their veracity.



52 Responses to “Was money easy or tight during the Great Depression?”

  1. Gravatar of foosion foosion
    31. August 2012 at 06:46

    We live in a post fact world.

    Steven Colbert’s truthiness has triumphed over truth. Candidates for national office have no compunctions about repeating easily checkable lies on national TV. Journalists have relegated accuracy to fact checkers, wholly separate from reporting. You’ve said enough about economists and accuracy.

  2. Gravatar of Ryan Ryan
    31. August 2012 at 07:09

    Prof. Sumner, Christopher Balding dealt a pretty significant blow to your claims, and we the readers would appreciate a more significant reply than what you just gave.

    My own experience in Beijing more closely mirrored Balding’s than yours. I also recall alerting you to North American grocery price inflation fully a year before you acknowledged it because it was running against your thinking at the time. Your response to me was that you personally hadn’t noticed any increases in food prices. That was a silly reply, and reminds me a lot of the reply you are giving Balding here.

    So how much of your impressions of China are based on wishful thinking and vague impressions, and how much are based on data and facts? We must all concentrate really hard on avoiding what Tyler Cowen calls “mood affiliation.”

  3. Gravatar of Andrew Andrew
    31. August 2012 at 07:14


    can’t we just use the big max index as a good estimate of the price level? China is pretty far down the list.

  4. Gravatar of Ryan Ryan
    31. August 2012 at 07:19

    Andrew – the Big Mac index implies that Singapore is a cheaper place to live than the USA. But is it true?

  5. Gravatar of Aidan Aidan
    31. August 2012 at 07:19

    How does the Sumner critique hold up when Bernanke says, as he did today and as he has for several years now, that current fiscal policy is a drag on the economy and that Congress needs to do more (see http://www.motherjones.com/kevin-drum/2012/08/bernanke-warns-congress-stop-stalling-economy)? Why would he choose to sabotage the steps that are, by his words, necessary to boost employment?

  6. Gravatar of Andrew Andrew
    31. August 2012 at 07:22

    Ryan, not sure anyone can say anything for certain, but the big max index is a popular shortcut for discussions such as these. Look at the countries at the top of the list. I’m sure we can agree that generally, the index provides a decent estimate. Not perfect, but decent.

    and yes, food in singapore (good food anyway) is much cheaper than in the US. just like it is in China.

  7. Gravatar of Richard A. Richard A.
    31. August 2012 at 07:32

    I think the IS-LM model has left a lot of economists confused. These confused economists end up confusing their students–some who will go on to become political leaders.

  8. Gravatar of Ryan Ryan
    31. August 2012 at 07:44

    Andrew, Singapore is one of the most expensive places on Earth to live. I’m pretty sure everyone knows this. Yes, you can buy cheap street food, but Balding makes a great point about this in his blog post: When you no longer wish to subsist on rice and onions, you are forced to acknowledge that food is not as cheap in places like Beijing and Singapore as averaged-out price levels would have us believe.

    I’ve eaten the boiled-bottom-feeder-and-random-weeds soups in Beijing, and yes, they’re very tasty, but that is not the kind of diet I would want to stake my life on.

  9. Gravatar of mobile mobile
    31. August 2012 at 07:48

    Balding makes these 3 claims about urban China:

    1. Wages (per capita GDP) are low

    2. Rent is expensive, especially relative to the low wages

    3. Occupancy rates are low

    In the U.S., occupancy and rents are positively correlated (high in New York and SF, low in Detroit). So how can all three of these claims be true about China, even in theory? High deadweight loss (taxes? corruption? a much harsher land-use regime than Waltham?)? Spectacular and coordinated mismanagement of the cities’ housing supply?

  10. Gravatar of wawawa wawawa
    31. August 2012 at 07:53

    Scott Sumner,
    I enjoy the blog and have read a lot of your posts but haven’t come across mention of why it is that we should be indifferent between RGDP and price level – an assumption that isn’t necessarily true yet required with NGDP targeting.

  11. Gravatar of johnleemk johnleemk
    31. August 2012 at 07:59


    As someone who has lived in Singapore and been back several times, the notion that Singapore is “one of the most expensive places on Earth to live” as far as food goes is absolutely ridiculous. Calling cheap Singaporean food “subsist[ing] on rice and onions” comes off as total bullshit to anyone with half a semblance of familiarity with Singaporean cuisine.

    Obviously for certain consumption baskets, Singapore is a ridiculously expensive place to live (you can’t own a bungalow or terrace house, probably can’t own a car). But the vast majority of Singaporeans are fine with this in the first place, and they certainly aren’t complaining about the high cost of *eating*.

  12. Gravatar of Saturos Saturos
    31. August 2012 at 08:00

    Today’s Bernanke speech: Monetary Policy since the Onset of the Crisis: http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm

  13. Gravatar of Ryan Ryan
    31. August 2012 at 08:40

    johnleemk – I defer to your experience, except that from the looks of this situation, different people can have radically different experiences in the same place. Take Balding vs. Sumner for example. My relatives in Singapore get by just fine, it’s true, but they also rent a room (not a unit) in an apartment and don’t have access to their own kitchen.

    So while I appreciate that we all have our own pet set of anecdotal evidence, most reliable sources I have seen having Singapore ranked rather highly, and I don’t think there’s anything controversial in noting that fact.

    For example: http://www.xpatulator.com/cost-of-living-review/Singapore-Singapore_178.cfm

    Your mileage may vary.

  14. Gravatar of Jor Jor
    31. August 2012 at 08:40

    The full quote was : “Prof. Sumner is saying as an economy, there is no bad investment in China, yes a couple deals might be bad but as an economy it is no problem. ”

    Balding seems to have gotten the better of this, so far.

  15. Gravatar of Major_Freedom Major_Freedom
    31. August 2012 at 08:48

    Fed money was substantially loosened during the Great Depression. However the people through their market behavior overwhelmed, and hence aggregate money, which includes credit money, was destroyed by the market process faster than the Fed created additional base money and any credit money pyramided on top.

    Why wouldn’t a market monetarist be supportive of the market process of money destruction overwhelming the Fed’s money creation? Shouldn’t this be a signal that the Fed is acting against the market, and not helping the market?

    If the market process destroyed hula hoops, commodore 64s, and fake dog poop, should the government reverse this and increase the supply of these things? If not, why should the state do this with the money commodity?

    There is such a thing as too much credit money and hence there is such a thing as too much money. The massive collapse in the money supply during the 1930s was the market’s way of “saying” that there was far too much destroyable money circulating in the economy in the first place. If the Fed “sits back” (which it didn’t in the 1930s BTW) and the market process takes over and collapses the aggregate money supply, this is ipso facto proof that the Federal Reserve System failed by creating too much money for the market prior!

    To claim that the Fed “failed” to create enough money during the 1930s is tantamount to claiming that the free market process is inherently a “failure”. Well, when you make THAT judgment, you can no longer consider yourself a free market advocate. You are now on your way to central planning land, for that is the logically implied solution to dealing with a “failed” system such as the free market.

    Pick a side.

    I know that the free market is not inherently a failure. The failure is on the part of those who don’t understand the free market and seek to crystalize anti-market activity according to “rules.”

    Yes, the market process did “fail” at something in the 1930s. It “failed” to accept coercion based non-market financial activity. It “failed” to not be itself. It “failed” to be something it is not.

    This “failure” of the free market should have been expected by those claiming to be economists. The free market is not a non-free market. The free market process is one process and no other. You can’t expect the free market to be so incredibly awesome and omnipotent that it can integrate with itself processes contradictory to the market process itself!

    This is the brain cramp that plagues market monetarists. They see money supplies collapsing by the market process, and instead of inferring from this the truth that it means too much money was created prior by either the market process itself or a non-market institution, they instead blame the non-market institution for not being able to consistently integrate itself into the market process. Ergo, the Fed “failed” to adequately boost a statistic that it never had the justification to increase in the first place.

    Spending targeting is just the latest in a line of abortive attempts by soft statists and central planners who want to “harness” the free market in some way, to reconcile and make permanent a stable integration of market and non-market financial activity, according to “rules”, despite the fact that such “rules” falsifies the financial information that is required for financial market activity to even exist.

    These people are suffering from an illusion that focusing on aggregates invariably leads. If the aggregate money supply collapses, then economists ask what are the micro-economic processes that would have led to such a thing. Market monetarists on the other hand just want to protect their central plan, built on an intellectual investment that is too embarrassing and painful to recant, so….they blame the Fed and hold the Fed to be at fault for not being able to be a market institution that can be integrated into market activity.

    Where is the analysis of the reasons why individuals would, without direction of the Fed, start destroying money left right and center during the 1930s? Of course, lazy monetarists take a page out of the Keynesian playbook and chalk it up to essentially mystical providence called “animal spirits”. This is tantamount to an admission that they don’t know. They seemingly prefer not to know. After all, once they do start down that path of inquiry, then a big red sign of “danger, you may never think the same way again” looms on the horizon.

    Market monetarism is not even a positive economics. Without central banks, market monetarism is empty. Same thing for Keynesianism. Not a positive economics either. Without deficit spending (and inflation), Keynesianism is empty.

    Contrast that with Austrianism, which is the science of individual human action, and it is actually universal, which is what a science must be.

    So MMs can have their central bank as long as not enough people understand money. In other words, MM thrives where ignorance prevails. MM can only spread to where knowledge retreats. These court intellectuals are not improving the free market, they are not protecting the free market, and they are not solving any problem inherent in the free market. Market monetarism is really just a cheerleading for “some” social cancer, based on the apathetic capitulation that social cancer is inevitable so why not have intellectuals in charge of money and interest rates, and oh, for argument’s sake, why not ensure that these intellectuals are market monetarists. Let the men without shame or moral scruples enforce by guns what market monetarists are far too sophisticated and civilized (read: too cowardly) to do themselves.

  16. Gravatar of Bill Ellis Bill Ellis
    31. August 2012 at 09:02


    A lot of pundits are saying this latest speech is signaling Fed action for real this time. I am hopeful…What do you think ?

  17. Gravatar of Mofo. Mofo.
    31. August 2012 at 09:20

    Scott, my understanding (and im not by any means a China watcher) is that nearly everyone thinks there is some degree of overbuilding in China, even the Chinese government. If you dont think Balding’s numbers are correct, what do you think the numbers are? At what point do you feel that Balding’s analysis becomes incorrect? %40 vacancy? %20? Your reply seems long on anecdotal evidence and short on rigorous explanation as to why Balding is wrong.

  18. Gravatar of Alexei Sadeski Alexei Sadeski
    31. August 2012 at 09:22

    Singapore is wildly famous for it’s delicious, varied, and CHEAP cuisine.

    And I don’t believe that the Big Mac Index tracks the price of noodles and onions.

  19. Gravatar of Doug M Doug M
    31. August 2012 at 09:40

    The Big Mac Index is a measure of Purchasing Power Parity — How many dollars does a Big Mac cost in your country.

    If you want to turn the Big Mac Index into a measure of cost of living you must divide the index level by per capita GDP. How many work hours does it take to afford a Big Mac.

    The most current data, I was able to find is a year old.


    As of this date, China is nearly equally expensive as the US.

  20. Gravatar of Randy W Randy W
    31. August 2012 at 09:58

    Is money tight right now? Charles Plosser says it’s “extraordinarily” accommodative:


    And Friedman keeps rolling over.

  21. Gravatar of Major_Freedom Major_Freedom
    31. August 2012 at 10:06

    And Friedman keeps rolling over.

    I love it how Friedman’s name is constantly being whored out by inflationists.

  22. Gravatar of Don Geddis Don Geddis
    31. August 2012 at 10:15

    @Aiden asks: “How does the Sumner critique hold up when Bernanke says”

    But this is easy. The market monetarists blame the US Fed directly, for the recession. But Bernanke is chair of the Fed, and certainly doesn’t blame himself and his colleagues. So he finds other targets.

    Market monetarists would simply say that Bernanke is wrong. It’s his own fault, not the fault of congress.

    And, lest you think this is a debate between different schools of macroeconomics, one of the most puzzling aspects of macro in the last few years, has been the contrast between what Bernanke himself was writing around 2000, vs. what he says and does now. Paul Krugman has a good essay on Chairman Bernanke vs. Professor Bernanke.

    Bernanke’s change in the last decade is one of the central mysteries of modern macroeconomics. Nobody understands why the contrast is so stark.

  23. Gravatar of D.Gibson D.Gibson
    31. August 2012 at 10:46

    Why do some people fear the Fed having cash-like assets on their balance sheet? I cannot see any downside, no matter what the total is. It is like they fear the Fed will freak out and destroy the markets by dumping assets. Bizarre! If the Fed wants to destroy markets, a limited balance sheet is not going to step them.

    Any other theories as to what the fearful are thinking??

  24. Gravatar of Essayist-Lawyer Essayist-Lawyer
    31. August 2012 at 11:00

    The reason so many economists accept the “bizarre” notion that equates low rates and an enlarged monetary base with easy money is obvious. Because low rates and an expanded monetary base have meant easy money throughout their lifetimes. Throughout their lifetimes, monetary expansion has always meant lowering rates and enlarging the monetary base. As long as they have lived, let alone studied economics and public policy, these things have been the same.

    Sure, they have read about some “bizarre” occurrence in the 1930′s when money was tight despite low rates and a bloated Fed balance sheet. But they always assumed that it was some weird historical curiosity, not something that would actually happen in the here and now. And now, when confronted with that weird historical curiosity coming about in our own world, they are having great difficulty accommodating it.

  25. Gravatar of Essayist-Lawyer Essayist-Lawyer
    31. August 2012 at 11:03

    Gibson, the answer is obvious. Monetary expansion has always led to inflation, at least in the lifetime of the people who fear it. They fear that if the Fed does not tighten at once, out of control inflation is just around the corner. This is not mere conjecture on my part. The fearful have been shouting it at the tops of their lungs for the past four years.

  26. Gravatar of Doug M Doug M
    31. August 2012 at 11:33

    Why do some people fear the Fed having cash-like assets on their balance sheet?

    Because an accumulation of assets implies an corresponding increase in liabilites.

    Other countries have demonstrated that there is a limit to balance sheet expansion before it becomes destabilising and leads to an episode of devaluation.

    Freidman is rolling over… Freidman advocated a constant rate of money growth. M2 is growing at about an 8% clip. I doubt he would support QE3.

  27. Gravatar of FormerSwingVoter FormerSwingVoter
    31. August 2012 at 11:36

    I’m a little surprised not to see anything about Michael Woodford’s preso at Jackson Hole today. It’s generating some mainstream buzz for NGDP targeting.

  28. Gravatar of StatsGuy StatsGuy
    31. August 2012 at 11:44

    I am pleased to see you and Gagnon communicating. I believe I mentioned 3 years ago whose company you were in. And now, Woodford too. So, that takes care of the modeling.


    “Other countries have demonstrated that there is a limit to balance sheet expansion before it becomes destabilising and leads to an episode of devaluation.”

    Um, OK, let’s devalue… That would be excellent. IF the world let us devalue. If the world doesn’t (they shouldn’t), then they match the money increase. That isn’t destablizing in a currency-trading sense, or in a trade balance sense, but only in a carry trade sense that people would invest in “hard assets”. I think hard assets are hitting their limits in the ability to absorb wealth, however – in any case, such an increase would lead to commodity inflation (price increases), so at least that increases NGDP -

    Scott –

    I think one main criticism of Bernanke’s speech is that he establishes a higher standard for non-conventional “intervention”. His justification for that is that it imposes costs. What I would really like to see is Bernanke spell out exactly what those costs are, rather than nebulously talking about them. That would be quite illuminating, since he’s clearly said that risk of hyperinflation is not real. So what are these mythical costs?

  29. Gravatar of Morgan Warstler Morgan Warstler
    31. August 2012 at 12:13

    “Prevent fiscal policy from impacting AD.”

    Print this on T-Shirts.

    it clearly says:

    Increase fiscal spending, and we’ll have to raise rates.

    Decrease fiscal spending, and we’ll have to lower rates.

    Want to buy nice things cheap? Fire public employees.


    The sentence: “Prevent fiscal policy from impacting AD.”

    Means to anyone that hears it, not just that Fiscal gets neutered.

    it means, you can’t pretend fiscal spending increases help the economy.

    The give up, is monetary easing / lower rates.

    Ben just told us to prepare for this.


    The difference here is in HOW IT IS EXPLAINED.

    The mistake is saying, cuts to Local, state, and federal governments mean we might have QE.

    Ben should say instead and say it simply:

    GOOD FOR YOU! Cut govt. spending! We’ll make sure demand stays constant and the economy grows!

    Speak to the hegemony int he voice they want to hear, giving them the upside advantages.

  30. Gravatar of Jim Glass Jim Glass
    31. August 2012 at 13:11

    Freidman advocated a constant rate of money growth

    He explicitly reversed himself on that in his later years.

    M2 is growing at about an 8% clip. I doubt he would support QE3.

    He also said the BoJ should just keep increasing the money supply until demand picked up, no matter how much it took.

  31. Gravatar of Bill Ellis Bill Ellis
    31. August 2012 at 15:11


    Last I saw…Scott is still on vacation in China.
    But I would like to know what he has to say about this too.

  32. Gravatar of Mark A. Sadowski Mark A. Sadowski
    31. August 2012 at 15:48

    In what is probably the most important paper being presented at Jackson Hole this weekend, Woodford (page 44) endorsed NGDPLT:


    “An alternative that I believe should be equally easy to explain to the general public, but that would preserve more of the advantages of the adjusted price-level target path, would be a criterion based on a nominal GDP target path, as proposed by Romer (2011) among others. Under this proposal, the FOMC would pledge to maintain the funds rate target at its lower bound as long as nominal GDP remains below a deterministic target path, representing the path that the FOMC would have kept it on (or near) if the interest-rate lower bound had not constrained policy since late 2008. Once nominal GDP again reaches the level of this path, it will be appropriate to raise nominal interest rates, to the level necessary to maintain a steady growth rate of nominal GDP thereafter.”

    David Beckworth and Marcus Nunes have posts on this today and Lars Christensen has two posts on this. This was also specifically addressed in Economix at the NYT and by Bloomberg. I think it was also briefly mentioned by the WSJ and the FT blogs.

  33. Gravatar of Tom Tom
    31. August 2012 at 16:18

    loose money / tight money.
    What’s the relationship with growth? Or spending?

    M1 M2 and (the late great) M3 — what the heck is “money”? Is housing equity money? What about when you take out a loan based on it, does it become money? Is it only money when you actually take out the loan, or is it “money” in the MV sense even if the loan is not taken out?

    People’s spending/ saving decisions are based on how much they are making, and expect to make, AND on how valuable their savings are, and how valuable those savings are expected to be. The big drop in house prices, and reduced house price increases, means folk are a lot less wealthy than they wanted to be.
    So they personally want to save more.

    The low interest rates means their savings grow very little from the magic of compound interest.
    So they want to save more.

    More people saving doesn’t make money tight, it makes AG less.

    A better measure of tight money would be the number of loans, and amounts, which are applied for but not approved by bankers. If there are few rejected loans, money is easy. If lots of rejects, money is tight.

    The Fed knows that it can reduce inflation by increasing interest rates.

    Why not just print more money, like $1 tril of base money, and use it to pay the gov’t bills? Then taxes don’t have to be raised, nor does the debt increase?
    Why not? Fear of inflation — but ok, why not print money until inflation increases.

    Of course, now with the drought based food shortage is a terrible time, because scarcity increases will look like inflation. But still.
    Just print the money.
    And stop paying Interest On Excess Reserves, too.

    Targeting NGDP is coming, because it will work better than prior policy rules. But it won’t stop the next bubble, (tho possibly historical caution might.)

  34. Gravatar of Bryan Willman Bryan Willman
    31. August 2012 at 16:38

    I’m a little confused by a different issue.

    If interest rates are 0, and the central bank is buying any security it can find an excuse to buy, but “money is still tight” perhaps meaning “money is still too hard to borrow at any price” – what exactly do we expect a central bank constrained by some variant of law as we know it, to do?

    The CB might put the heat on big banks to lend rather than hoard “excess” reserves. It might buy even more “crappy paper” – but if at the normal transaction level, where borrowers who don’t look like IBM or Microsoft are trying to borrow for ordinary projects, what real effect will this have?

    It is quite possible that the fed has lots of ammunition, but that none of it has any real effect on the intended targets. If they don’t have an “armor piercing” or “broken channel bypassing” bullet to fire, their effect may be very limited indeed.

    (And all the while very low interest rates are screwing over a fair sized pool of people who depend on interest for disposable income – thus depressing AD…)

  35. Gravatar of "Why have roughly 99% of macroeconomists completely flip-flopped from the view that money was ultra-tight during the 1930s? Why do they now think low rates and a bloated base mean easy money?" « Economics Info "Why have roughly 99% of macroeconomists completely flip-flopped from the view that money was ultra-tight during the 1930s? Why do they now think low rates and a bloated base mean easy money?" « Economics Info
    31. August 2012 at 17:00

    [...] Source [...]

  36. Gravatar of Greg Ransom Greg Ransom
    31. August 2012 at 17:37

    White doesn’t say what you’ve decided to claim he said.


  37. Gravatar of Morgan Warstler Morgan Warstler
    31. August 2012 at 17:57

    Yes, Scott you really wimped out on White.

    The MAIN THING is there are seriously bad effects from not kicking the government in the ass.

    After all it is just one wing (politics) of life.

    The banks have a completely different concern (economics)

    Altho they work for the same people (hegemony), they each have different agendas….

    AND YOU have admitted it directly with your Fed Neuters Fiscal stance. You say Fed gets what IT wants.

  38. Gravatar of RebelEconomist RebelEconomist
    1. September 2012 at 00:13

    So what do “market monetarists” think does define tight or loose money? And don’t say “NGDP growth”, because that is an outcome, not an input.

  39. Gravatar of Vivian Darkbloom Vivian Darkbloom
    1. September 2012 at 01:53

    “There’s plenty to object to in White’s call for tighter money, but I’d like to focus on a peculiar trend in macroeconomics, the bizarre equation of “ultra-easy money” with low interest rates and a bloated monetary base.”

    I’ll admit that I’ve not read all 45 pages of White’s paper. But, I’ve learned to be on the alert for the confusion between the concepts of “tight money” or “ultra-easy money” etc;, and the quite different idea of “easy monetary *policy*”. It is not inconsistent to say that money is (currently) “tight”, but that monetary *policy* is current easy or expansionary. It could simply mean that that policy has not (yet) been successful.

    Thus, I was struck by the very first sentence of the abstract to White’s paper: “In this paper an attempt is made to evaluate the desirability of ultra-easy monetary policy by weighing up the balance of the desirable short-term effects and the undesirable long-term effects–the unintended consequences.” That is summed up even more concisely in the title to the paper “Ultra Easy Monetary Policy and the Law of Unintended Consequences”.

    Perhaps one could conclude from White’s paper that he believes money is *currently* too tight; however, I’ve rarely encountered “the bizarre equation of “ultra-easy money” with low interest rates and a bloated monetary base.” I have, however, frequently encountered the equation of “ultra-easy monetary policy” with low interest rates and a bloated monetary base.

  40. Gravatar of ssumner ssumner
    1. September 2012 at 02:23

    Rebeleconomist. Bernanke defines it in terms of NGDP growth (and inflation), so that’s good enough for me.

    Mofo, Of course China has lots of vacant houses, and overbuilding in various markets. Look at Ordos. I have absolutely no idea how much overbuilding their is in Beijing.

    I also have no idea what the population of the Central African Republic is, but if someone told me it was 5 quadrillion, I’d say he’s wrong. People need to use some common sense. He made the absurd claim, it’s up to him to provide some evidence. He hasn’t.

    Jor, The full quote is still totally false.

    Doug, You are confusing “cost of living” with standard of living (real income) They are completely unrelated concepts.

    Ryan, If you thought Beijing was expensive you were probably experiencing it as a tourist. It is expensive in some respects for tourists. But the places the Chinese eat are dirt cheap, as are taxis, haircuts and other services. Balding has his own experience, but all scientific studies support my impressions and contradict your impressions.

    I am certain you mischaracterized my views in food prices. I never denied food prices were increasing, I just didn’t regard the overall impact on inflation as being all that large. If you don’t think you have mischaracherized my views, find the exact quotes.

  41. Gravatar of Ryan Ryan
    1. September 2012 at 04:35

    Sumner – I was experiencing Beijing as who I am. As a type 1 diabetic, I cannot just simply show up at a dumpling house and chow down. That kind of “OMG I love street food” behavior is as much a part of the tourist experience as eating in the lounge of the Hyatt. The average Beijing citizen does not simply subsist on a diet of street food. People shop for groceries.

    Anyway, we are discussing a strawman here. My point was more about the empty buildings than the cost of food. I take Balding’s price quotes at face value because I have no reason to believe otherwise. He’s not the Bureau of Statistics, but he did back up his claims with photographs and an attempt at a case-study.

    More importantly, you can’t just dismiss people who disagree with you as having an incorrect experience. You’re entitled to disagree, but you are not entitled to make broad dismissals of any point of view that runs counter to your thinking.

    I most certainly did *NOT* mischaracterize your views. We are talking circa 2009, if I remember correctly. I have tried to dig up that quote a few times in the past and can’t find it. It is old and I would have to search for every instance of a comment by “Ryan” on your blog. I will give it another try right now, but I doubt I will find a comment of mine from >3 years ago.

  42. Gravatar of Don Geddis Don Geddis
    1. September 2012 at 09:10

    @ Bryan Willman:

    “and the central bank is buying any security it can”

    Oh, but it isn’t. The Fed had QE1 and QE2, but they were limited-time programs, and they stopped.

    “What exactly do we expect a central bank … to do?”

    Easy: (1) buy more securities (T-bills); (2) set expectations, by making a public commitment that the security buying will continue indefinitely until NGDP (or inflation, or …) rises to the target level.

    “low interest rates are screwing over…”

    The low rates are a symptom, not a direct cause. Rates are low because the economy is not growing sufficiently. People who are relying on interest income to live, have implicitly bet on the country being wealthier in the future than it is today. That’s why savings earns any interest at all.

    You don’t fix this by artificially raising interest rates. You fix it by having the economy grow, and the rates will reflect the future value of investing the money today.

  43. Gravatar of Negation of Ideology Negation of Ideology
    1. September 2012 at 17:01

    I think any discussion of whether money is “easy” or “hard”, (“loose” or “tight” if you prefer) has to be about whether money is easy or hard to come by.

    So it doesn’t matter whether the base is larger or smaller, or interest rates or higher or lower. All that matters is whether it is easier or harder to earn money relative to what is was in the past or relative to expectations. And the only measure of that is NGDP growth per person.

    But market monetarists already know that.

  44. Gravatar of Major_Freedom Major_Freedom
    1. September 2012 at 18:29


    I think any discussion of whether money is “easy” or “hard”, (“loose” or “tight” if you prefer) has to be about whether money is easy or hard to come by.

    So it doesn’t matter whether the base is larger or smaller, or interest rates or higher or lower. All that matters is whether it is easier or harder to earn money relative to what is was in the past or relative to expectations. And the only measure of that is NGDP growth per person.

    I think any discussion of whether money is “easy to come by” or “hard to come by”, (“easy” or “hard” if you prefer) has to be about whether money is loose or tight.

    So it doesn’t matter whether money is easier or harder to come by relative to what it was in the past or relative to expectations, or NGDP growth per person. All that matters is whether the money supply is larger or smaller. And the only measure of that is M3 growth per person.

    But economists already know that.

  45. Gravatar of ssumner ssumner
    1. September 2012 at 19:15

    Ryan, I provided links to much more scientific studies of Chinese prices than Balding did. I’ve also shopped in Chinese supermarkets for numerous food items. I’ve travelled all over China. If he wants to refute the scientific studies that show China has a much lower cost of living, he’ll need more evidence than a few anecdotes.

    As far as street food, you can get a perfectly good dinner in a Chinese restaurant for just a few dollars (say 4 or 5 bucks.) Just don’t eat where the tourists eat.

    In addition, he completely mischaracterized my views, which gives me no reason to take his evidence seriously.

    I still deny saying food prices were not increasing. It’s obvious they are increasing, and have been for almost my entire life. I await your evidence.

  46. Gravatar of Don Geddis Don Geddis
    2. September 2012 at 14:47

    MF: You’re a curious one. I wonder why you continue to post here. Leaving aside the actual truth of any particular economic theory, you seem to act like a child. You constantly post pages and pages of text that aren’t relevant to the point being discussed, typically repeating the same tired points you’ve posted numerous times before. Much like a child screaming in order to get people to pay attention.

    And in this latest post above, NoI attempts to contribute. Maybe he’s right, maybe he’s wrong, but your response is hardly more sophisticated than “I know you are, but what am I?!” I’ve heard more mature exchanges on the kindergarten playground.

    It’s clear by now, that you must get pleasure from annoying the rest of the community here. But is that really your only goal in life? Have you no grander ambitions, than to waste your hours for no greater purpose than merely causing others frustration? Is it really worth your time?

  47. Gravatar of Major_Freedom Major_Freedom
    2. September 2012 at 17:59

    Don Geddis:

    You’re just upset that I have refuted you so often. You have no interest in the truth, only the appearance of interest. You have no interest in reasoned and informed debate, only appeal to authority and ad populum. You have no interest in mature discussions, only patronizing “holier than thou” posturing.

    My response to Ideology was designed to show what I consider to be its utter emptiness and its completely arbitrary adherence to NGDP. In this way, I have made a “contribution”.

    You are of such a disposition and intelligence, that a puerile response that invokes analogies referencing children, coming from you, is only further evidence that I made a cogent point. If you didn’t catch on to my post, and you responded favorably to it, I would have only doubted what I said, to the point of questioning whether I was even on the right track.

    If I cause Ideology frustration, if I cause you frustration, then considering your kooky and extreme convictions regarding economics and political philosophy, that is a good thing.

    If you want to talk about what gives who pleasure, then I invite you to realize that what gives you pleasure is condescension towards me. I don’t mind, because unlike you, I can take the flack. I don’t whine and complain like a little princess.

  48. Gravatar of Don Geddis Don Geddis
    2. September 2012 at 20:23

    MF: You haven’t upset me, because of the content of what you said. I also don’t recall you ever refuting me, because you hardly ever even seem to say anything relevant. You don’t cause me any frustration because of any disagreement about economics or philosophy.

    The only thing that is frustrating is your non-constructive behavior. I would welcome a reasonable Austrian-phile, someone who wanted to question the economic assumptions here, and suggest a different perspective. That would be enlightening and educational.

    You are despised, not because of your intellectual perspective, but only because of your childish behavior. People here rarely listen to your intellectual points any longer.

    Whatever small pleasure condescension towards you might provide, I would easily give it up if only you would go away. (Or, better, if you would become constructive by acting more respectfully and mature.)

  49. Gravatar of RPLong RPLong
    3. September 2012 at 07:08

    Sumner – I have tried literally dozens of times to post a reply to you, and your blog isn’t having it. I located the original post and provided both my original comment and your reply to me.

    I am not sure why the comment will not post, but I am posting it to my own blog, and you may read it there.

  50. Gravatar of Negation of Ideology Negation of Ideology
    3. September 2012 at 08:42

    Don Geddis -

    Thanks. That’s a common tactic of MF. Instead of just saying he disagrees and why, he reverses your comment. He seems to think it makes him look clever or something.

    I made a good faith effort to take MF seriously and explored the basis for his opinions. I followed him down the rabbit hole into his world of people paying their taxes in pork bellies and live alligators – and even further down into his world where there is no government and everyone hires their own private security firm, and there is no violence because of the deterrence factor of people defending their own property.

    And no, I am not joking.

  51. Gravatar of TheMoneyIllusion » The anti-Friedman TheMoneyIllusion » The anti-Friedman
    5. September 2012 at 06:00

    [...] money has been very tight.  Cochrane’s not the only one who makes this assumption, indeed in this recent post I argued that 99% of economists now seem to agree with him.  So now I’m the outlier. [...]

  52. Gravatar of Spencer Dale, Chief Liquidationist « uneconomical Spencer Dale, Chief Liquidationist « uneconomical
    10. September 2012 at 15:30

    [...] monetary policy.   Leaving aside whether UK monetary policy is “loose” (hint: really, it’s not), what has Mr Dale come up with? For example, a recent literature has highlighted the possibility [...]

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