Money isn’t “easy”– A rant

I am traveling today, so only have time to complain about some themes I keep coming across when reading the press and speaking to people out in the real world.  No links.

1.  There is no reason at all for the ECB to look around for transmission mechanisms to boost the eurozone economy.  Europe is in recession because the ECB WANTS IT TO BE IN RECESSION.  Yes, the ECB doesn’t know that it wants a recession, but the NGDP growth it is producing will inevitably produce a recession in the eurozone.  OK, they aren’t even targeting NGDP, but the highly flawed CPI including oil and VAT that they are trying to hold well below 2% will inevitably produce the sort of slow NGDP growth that will inevitably produce recession.

2.  The ECB is not at the zero bound.  Over the past few years they’ve been repeatedly steering eurozone inflation through conventional policies of raising and lowering the short term interest rate.  If they had a broken transmission mechanism they would not have been raising rates during 2011.

3.  And even if they were out of room to cut rates, they are not out of paper and ink.  There is no need to look for wacky UK-style proposals to stimulate bank lending–that’s what got us into this mess in the first place.  They need to do monetary stimulus, WHICH HAS NOTHING TO DO WITH BANK LENDING.  More currency depreciates the value of a euro note for the same reason that a big apple crop depreciates the value of an apple.  Does a big apple harvest only cause apple prices to fall if bank lending is stimulated?  Of course unlike apples, currency is durable.  Hence the increase needs to be (expected to be) at least partly permanent.

4.  Money is very tight in the eurozone, using the Bernanke NGDP/inflation criterion for tightness.  They don’t need new ideas, they need to adopt an easy money policy.  The bank lending channel was just as broken in 2010, when eurozone GDP was rising.

5.  Is there any excuse for the press to still be talking about “easy money” throughout the developed world?  (A view that seems to be based on little more than low interest rates.)  I mean seriously, after the last 6 months in Japan, how can people still equate easy money with low rates?  Just to refresh your memory, Japan’s had near zero rates for 16 years and nothing has changed in the past 6 months.  Yet when you talk to finance-types you get the impression the current stock market booms are due to low interest rates caused by easy money.  That “easy money” policy of low rates  brought the Japanese stock market from 39,000 in the early 1990s to 8675 by mid November 2012.

6.  Then Japan really did adopt a slightly easier money policy, and stocks soared 70% in 6 months, even though the dominant paleo-Keynesian narrative says that monetary stimulus has no effects at zero rates.  Oh wait, they’ve just invented a new theory!  How convenient!  At zero rates the liquidity trap applies to output but not stock prices, which are raised though the finance equivalent of “immaculate conception.”

7.  For anyone with two eyes, the past few months have decisively confirmed the Bernanke/Friedman/Mishkin/market monetarist view that low rates do not mean easy money.  That high rates don’t mean tight money.  And yet the other 99.999999% of humanity continues to blather on about “tight money” in 1979 and the Latin American hyperinflations, and “easy money” in the 1930s and the late 1990s Japanese deflation, and the current morass.

8.  Again, eurozone tight money is keeping eurozone NGDP flat, and that’s a sufficient condition for a recession.  Yes, they may also have supply-side problems, but that’s beside the point.  Tight money is a sufficient condition for recession.  They can adopt a policy of 4% NGDP growth if they want to; they simply don’t want to.  Until that dynamic changes, the eurozone will continue to under-perform.

9.  Nothing is gained by disaggregating the eurozone.  Yes, some countries are healthier than others, but easier money will boost the overall eurozone NGDP, and that’s likely to help the weak as much as the strong, perhaps more.  Recall that the current tight money policy HURT THE WEAK MUCH MORE THAN THE STRONG.


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58 Responses to “Money isn’t “easy”– A rant”

  1. Gravatar of W. Peden W. Peden
    18. May 2013 at 08:01

    Most people still believe that export surpluses are an intrinsically good thing; that a rise in costs can cause a permanent rise in the price level; that headline tax rates tell you how much someone is being taxed; that tax indicidence falls on the person who directly pays the tax; that budget deficits are inflationary; that imposing a tariff on a foreign country hurts that other country and benefits one’s own country; and that raising taxes necessarily raises revenue.

    In other words, I don’t think that the monetary policy = interest rates view is going to die soon. America has been off the gold standard for 80 years and people still have a tendency to ask questions like, “What backs money?” The confusion of monetary policy targets (whether gold or interest rates) with monetary policy actions dies hard.

  2. Gravatar of Michael Michael
    18. May 2013 at 09:04

    Scott wrote:

    “Recall that the current tight money policy HURT THE WEAK MUCH MORE THAN THE STRONG.”

    To me, this is so blatantly obvious that it is not even worthy of debate. Yet, the opposite view is entrenched. “QE is artificially pumping up stock prices for the benefit of Wall St”, “tight money will protect the little guy against inflation”. etc.

  3. Gravatar of Don Geddis Don Geddis
    18. May 2013 at 09:08

    W. Peden has a good point. Although of course “most people” don’t have any formal training in economics. E.g. take the famous Samuelson quote for a “meaningful and non-trivial” result from economics: Comparative Advantage in international trade. How many people can distinguish that from their (false) intuition about absolute advantage? And that one has universal consensus among economists!

    So the real question isn’t the “most people” question. You need to start with the academic community. And then maybe as a second step, reporters who write articles on economics. (And only long long after that, “regular people”.)

    But it seems to be asking too much, for even the reporters to get this stuff right, if there are still prominent academics who publicly continue to get it wrong.

  4. Gravatar of kebko kebko
    18. May 2013 at 09:14

    W. Peden. Great list. I’ll add:
    Capital moves to places with low wages; and the more jobs it takes to accomplish something, the better it is for the country.
    All things considered, I’d say Scott should simply take the public confusion about it as a sign that he’s right. Maybe Scott’s best course of action is to start a hedge fund to trade on this insight. When the excess gains are bid away, and the hedge fund stops being profitable, he’ll know that it has finally sunk in.

  5. Gravatar of J J
    18. May 2013 at 09:56

    An interesting phenomenon is that economists are the ones ruining NGDP targeting’s reputation, not uninformed citizens. Most people don’t really know what NGDP is and so wouldn’t be morally opposed to a policy of increasing NGDP (as they are opposed to raising inflation). However, some economists make sure to clear it up for the public and explain that NGDP target fans are asking for more inflation.

  6. Gravatar of J J
    18. May 2013 at 09:59

    Professor Sumner,

    You should start making counterfeit money and handing it out. If and when you are caught, you can present a justification defense. Recessions kill people, so you were only trying to save lives! The trial would turn into you publicly presenting evidence that NGDP targeting can vastly improve output and employment.

  7. Gravatar of W. Peden W. Peden
    18. May 2013 at 10:19

    Kebko,

    Very good examples, not least because the first was seriously proposed by an influential German philosopher/economist who shaped much of the 20th century.

    The second one is at the core of the Luddite movement in all its forms. It always reminds me of the story of Milton Friedman going through China and asking why the workers on the roads were using such primitive tools. His guide responded that it created more employment to use primitive tools; Friedman replied that even more employment would be created if they used toothbrushes!

    Here’s one that is VERY common in academia and was also part of a different 19th century economist’s influential theory: people cost resourcesand on average add less than they consume. A collary of this theorem is that the fewer people you have relative to natural resources, the better, which is presumably why Zimbabwe is so much more prosperous than Luxembourg. As Julian Simon pointed out, the truth is the opposite of the Malthusian conception: people are the ultimate resource, produce on average much more than they consume, and there are many many things that can only be accomplished with the economies of scale that come with a certain population size e.g. civilization in its entirety.

  8. Gravatar of Daniel J Daniel J
    18. May 2013 at 10:27

    David Romer on financial crises. He writes briefly about nominal GDP targeting as a possible solution but wants more quantitative analysis on it. I think it’s funny how from time to time serious economists want quantitative analysis on this before it’s tried, yet the only way to get this data is to try it. Something must give.

  9. Gravatar of Daniel J Daniel J
    18. May 2013 at 10:27

    Woops forgot link. Here you go.
    http://blog-imfdirect.imf.org/2013/05/03/preventing-the-next-catastrophe-where-do-we-stand/

  10. Gravatar of Kailer Kailer
    18. May 2013 at 11:17

    The more I read your blog, the more ostracized I feel. I can put up with current events programs talking about how “almost all economists agree” that austerity is ruining the economy. It’s irritating, but they’re journalists, you expect that. But central banks employ legions of PhD economists, who spend they’re whole lives researching this stuff, and yet they’re the “almost all economists” those journalists are talking about. I actually heard Mark Carney call Jean-Claude Trichet an “excellent” central banker. Am I missing something here? In exactly what way is Jean-Claude Trichet an excellent central banker?

    And the funny thing is, they don’t buy the crap they’re selling. Look at every major CB forecast that followed the BoJ announcement. I’m guessing every one of them upgraded their forecast for Japan GDP growth and Price growth. The Bank of Canada did; the IMF did; and when the ECB releases its forecast in June, I’m guessing it will too. So they must believe that unconventional monetary policy is effective, how then can ECB policy be effective? Is it just diplomacy? Are they more worried about Mario Draghi’s public image than the fact that the ECB is unnecessarily inflicting misery on thousands of people? Or do they just not see the inconsistency in they’re own message?

  11. Gravatar of marcus nunes marcus nunes
    18. May 2013 at 11:22

    This is a picture of France. No wonder Hollande wants to do ‘something’:Note the damage the 2011 ECB rate increase did.
    http://thefaintofheart.wordpress.com/2013/05/17/summon-la-resistance/

  12. Gravatar of W. Peden W. Peden
    18. May 2013 at 12:57

    Marcus Nunes,

    Those graphs are astonishing. I hadn’t realised how much of France’s problems are demand-driven rather than supply-side.

  13. Gravatar of Steve Steve
    18. May 2013 at 13:12

    I propose raising the inflation target to 4% in order to produce the bubble popping ‘tight money’ (i.e., higher interest rates) the various media and economic commentators want.

  14. Gravatar of W. Peden W. Peden
    18. May 2013 at 13:29

    Steve,

    I like it!

  15. Gravatar of Jordan Jordan
    18. May 2013 at 13:32

    W. Peden,

    So if low rates push down discount rates and if expectations of sustained QE lower the equity risk premium then stocks will go up to the benefit of stockholders, whether or not money is “easy” or not. If money is not “easy” in the U.S., yet QE and monetary policy have boosted asset markets, then this view you think is wrong is very compatible with Scott’s… tight money hurts the weak more than the strong view.

  16. Gravatar of Aldre Aldre
    18. May 2013 at 13:54

    Why you have not yet responded to this misleading article of Paul Krugman?

    http://krugman.blogs.nytimes.com/2013/05/16/the-smithkleinkalecki-theory-of-austerity/

  17. Gravatar of W. Peden W. Peden
    18. May 2013 at 14:01

    Jordan,

    I think that view suffers from being incompatible with the facts: the Dow has yet to match its pre-crisis peak in real terms, but has made up most of the difference. What has happened to real wages and salaries in that same period? They’ve has yet to match their pre-crisis peak in real terms, but have made up most of the difference-

    http://research.stlouisfed.org/fred2/graph/fredgraph.png?&id=DJIA_GDPDEF,WASCUR_GDPDEF&scale=Left,Left&range=Custom,Custom&cosd=2005-01-01,2005-01-01&coed=2013-01-01,2013-01-01&line_color=%230000ff,%23ff0000&link_values=false,false&line_style=Solid,Solid&mark_type=NONE,NONE&mw=4,4&lw=1,1&ost=-99999,-99999&oet=99999,99999&mma=0,0&fml=a%2Fb,%28a%2Fb%29%2A110&fq=Quarterly,Quarterly&fam=avg,avg&fgst=lin,lin&transformation=lin_lin,nbd_lin&vintage_date=2013-05-18_2013-05-18,2013-05-18_2013-05-18&revision_date=2013-05-18_2013-05-18,2013-05-18_2013-05-18&nd=_,2007-12-01_2007-12-01

    Both are at about their 2006 level in real terms. Neither indicate easy money. What has happened is that the Fed has done just enough stimulus to keep the US on a path between depression and the horror of <2% inflation.

  18. Gravatar of W. Peden W. Peden
    18. May 2013 at 14:14

    For comparison, here’s the Dow and wages from the post-1982 recession:

    http://research.stlouisfed.org/fred2/graph/fredgraph.png?&id=DJIA_GDPDEF,WASCUR_GDPDEF&scale=Left,Left&range=Custom,Custom&cosd=1981-05-26,1981-05-26&coed=1987-05-16,1987-05-16&line_color=%230000ff,%23ff0000&link_values=false,false&line_style=Solid,Solid&mark_type=NONE,NONE&mw=4,4&lw=1,1&ost=-99999,-99999&oet=99999,99999&mma=0,0&fml=a%2Fb,a%2Fb&fq=Quarterly,Quarterly&fam=avg,avg&fgst=lin,lin&transformation=lin_lin,lin_lin&vintage_date=2013-05-18_2013-05-18,2013-05-18_2013-05-18&revision_date=2013-05-18_2013-05-18,2013-05-18_2013-05-18

    THAT’S what you tend to see with easy money. Both the Dow and wages had passed their real-terms 1981 level by the end of 1984.

  19. Gravatar of W. Peden W. Peden
    18. May 2013 at 14:25

    * The horror of >2% inflation. Damn notation!

  20. Gravatar of Negation of Ideology Negation of Ideology
    18. May 2013 at 15:03

    “For anyone with two eyes, the past few months have decisively confirmed the Bernanke/Friedman/Mishkin/market monetarist view that low rates do not mean easy money. ”

    Exactly. The maddening thing to me is that the press is going to give credit entirely to the fiscal stimulus in Japan rather than the monetary stimulus. They’ll call it a validation of Keynesianism.

    The good news is there’s reason for optimism. If they stick with it, monetary stimulus will work first in Japan, which will strengthen Carney’s hand in the UK, and Bernanke’s in the US. Then, maybe even the ECB will see the light.

    And the Keynesians will forget about all that talk about fiscal austerity and claim fiscal stimulus finally worked.

  21. Gravatar of Jordan Jordan
    18. May 2013 at 15:51

    W. Peden & Michael.

    My fault, my last post was in response to Michael’s stock market comment, not W. Peden. Sorry.

    Anyways, I’m not saying that money is easy per se, but couldn’t the following be happening.

    1) Low rates and sustained QE pushed down discount rates and asset prices up
    2) Money isn’t necessarily easy in this scenario as velocity/lending/inflation aren’t high
    3) This is compatible with Scott’s “tight money hurts the weak” thesis

  22. Gravatar of Tom Brown Tom Brown
    18. May 2013 at 16:05

    Hahaha… you’re up against a LOT Scott. May I remind you of the words of one of our most preeminent political leaders (who likes to dabble a bit in monetary policy on the side) in regards to Dr. Bernanke and his policies:

    “If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas.” — Governor Rick Perry

    I’m sure if Gov. Perry were appointed Fed chairman he’d have things ship shape in no time!

    If case you haven’t seen it, here’s a actual clip of Rick meeting Dr. Bernanke face to face when they were young men:

    http://www.veoh.com/watch/v20888753eaSC6FEd?h1=SNL+-+Danger+Probe+-+ProBAtion!+For+Paul+W

    “You got a lead pipe back there?”

    Hahahaha! God Bless America!

  23. Gravatar of W. Peden W. Peden
    18. May 2013 at 17:38

    Jordan,

    That’s a logical possibility, but markets are forward looking, so the fact that asset markets are doing well right now and the US economy is doing only marginally better doesn’t tell us much. If the market has fundamentally mispriced the US economy, then we’ll see a nasty correction down the line, and if I could predict such an even then I’d be a lot more prosperous!

  24. Gravatar of Jordan Jordan
    18. May 2013 at 18:31

    Yeah, valuations aren’t really overdone and to the extent lower discount rates are persistent in the future then valuations could be just fine. Beyond the discount rate argument, I haven’t seen much in the last 6 months that point towards a better outlook overall, either US, or foreign, except Japan.

  25. Gravatar of JJriverrun JJriverrun
    18. May 2013 at 19:05

    While we are ranting,
    Is there anything more infuriating than listening to a news report that goes ‘unemployment remained stubbornly high last month. However, inflation was kept in check at 1.25%’?

    Thank god the press continues to pat the fed on the back for failing MISERABLY to achieve either of its legal mandates.

  26. Gravatar of Saturos Saturos
    18. May 2013 at 21:30

    HAS HULK UNDERSTOOD YOU CORRECTLY?
    https://twitter.com/ECONOMISTHULK/status/334949953883488256

  27. Gravatar of James in London James in London
    18. May 2013 at 22:11

    Scott. There is a paradox in your critique of “finance types” not getting market monetarism, but “finance markets” getting it. Why is this?

    I think the “finance types” you meet in the real world all trained economists, and have the same views as the trainers, ie the 99% of academic economists who don’t get it.

    So who are the untrained financial market participants who push the buttons to trade instantly on any sign of monetary easing, be it slightly increased odds on Yellen as Bernanke’s successor, Carney’s December 2012 speech on “Guidance” or an opinion poll in Japan showing Abe’s party ahead?

    I suppose the answer must be that the financial markets are a form of mass democracy, where the silent majority gets its way, even if its spokesman are a bunch of idiots. Idiots who sadly influence public policy, like central bank money management.

    I attended a Barclays investment bank-hosted speech the other day where an ECB Diector dribbled out the usual homilies on inflation credibility, while simultaneously destroying Europe’s economy,. But one of the six finance-type questioners did calmly, and eloquently, put the MM case. Of course, the Director ridiculed it and the idiot chief panjandrum from Barclays called it a “controversial” question, but I went away happy that someone other than me had asked the right question.

  28. Gravatar of James in London James in London
    18. May 2013 at 22:14

    The 1% of finance type who get it, had become 2%. A 100% increase.

  29. Gravatar of Jim Crow Jim Crow
    18. May 2013 at 22:24

    I think most of the readers here would agree that inflation targeting has proven disastrous these last few years. But even if you’re a good faith believer in that approach as opposed to NGDP (risk aversion sucks, but it is human nature) can anyone explain what in the world is the theoretical justification for the ECB to include VAT and oil prices in their inflation target? I am gobsmacked by that!

  30. Gravatar of Benjamin Cole Benjamin Cole
    18. May 2013 at 22:50

    Yes–the Fed is loose, and easy and going into uncharted waters.

    So why do we have 1 percent inflation? Why are import and export prices falling? And interest rates dead? And economic growth anemic, and unused capacity a-plenty?

    No matter—that’s because the Fed is easy, and loose and and in charted waters….. and you saw what happened to gold prices, right? Proved everything.

  31. Gravatar of Michael Michael
    19. May 2013 at 03:04

    Jordan wrote:

    “1) Low rates and sustained QE pushed down discount rates and asset prices up
    2) Money isn’t necessarily easy in this scenario as velocity/lending/inflation aren’t high
    3) This is compatible with Scott’s “tight money hurts the weak” thesis”

    #1, if true, is evidence that money is tight. Asset prices do not respond positively to rising inflation expectations *unless* money is tight. (For one thing, inflation raises effective tax rates on capital and corporations).

    See this post (and you can find more on this on David Glasner’s blog, Uneasy Money):

    http://www.themoneyillusion.com/?p=19031

    Quoting Scott: “In late 2010 David Glasner did a study showing that TIPS spreads and stock prices became highly (and positively) correlated around 2008. Previously the correlation had been rather weak. The most plausible interpretation is that the stock market began to root for higher inflation (and by implication higher NGDP) at about the time when the US economy began to suffer from a demand shortfall.”

  32. Gravatar of Jeff Jeff
    19. May 2013 at 05:33

    Anyone paying attention for the last few years already knows that many professional economists don’t know even basic economics. So why expect them to know anything much about monetary economics?

    You get ahead in the profession today not by knowing economics or giving good policy advice. You get ahead by manipulating ever-more-complicated mathematical models that actually explain nothing about the real economy. If they did, people using those models would make better forecasts than people who don’t. I am unaware of any studies that show that.

  33. Gravatar of J J
    19. May 2013 at 06:07

    Jeff,

    Just because those models, such as RBC models, don’t explain things well yet, and are particularly bad at explaining demand-side recessions, doesn’t mean that working with them is useless. Part of economics is related to policy directly and that involves understanding a lot of the literature and some basic stuff. Another part of economics is about developing literatures and sometimes ideas can take a long time to become useful. That doesn’t mean we should stop investigating them. And it doesn’t mean that economists who spend all day working with RBC models and don’t understand anything else are worthless. They just should know their limits and not give policy advice. We don’t need every single economist to write blog posts advocating for NGDP targeting.

  34. Gravatar of Full Employment Hawk Full Employment Hawk
    19. May 2013 at 08:24

    “doesn’t mean that working with them is useless”
    RBC models tell us how the economy WOULD BEHAVE in the short run if there were no demand shocks, so that output was always at potential output and all short-run fluctuations were caused by fluctuations in the rate of growth of potential output. That permits them to be used as a benchmark against which the performance of actual economies can be compared in order to isolate the effects of demand shocks on the economy in the short run.

  35. Gravatar of Full Employment Hawk Full Employment Hawk
    19. May 2013 at 08:42

    “tight money will protect the little guy against inflation”

    What the little guy needs to be protected against is unemployment, underemployment, and the danger of losing his job. Having a good job is a lot more important to the little guy than absolute price stability. Protection against a low rate of inflation is only important to the rentier class who do not face the danger of unemployment. High unemployment even harms working people who have a secure job because it puts downward pressure on real wages and reduces the bargaining power of workers.

  36. Gravatar of Full Employment Hawk Full Employment Hawk
    19. May 2013 at 08:51

    “You should start making counterfeit money and handing it out”

    On can make a credible case that during periods of tight money causing the economy to be depressed, the counterfeiters, who add to the supply of money, are actully the good guys while the central bankers maintaining the tight money are the bad guys.

    Perhaps the bitcoins, if the add to the total amount of money in circulation, rather than just replacing an equal amount of government money, will do the same job.

  37. Gravatar of W. Peden W. Peden
    19. May 2013 at 09:00

    If counterfeiters are heroes in periods of tight money, then are people who burn money heroes in period loose money?

  38. Gravatar of J J
    19. May 2013 at 09:11

    W. Peden,

    Yes. And presumably, Ron Paul and Rick Perry would applaud any money burners today.

  39. Gravatar of Michael Michael
    19. May 2013 at 09:45

    FEH wrote:

    “What the little guy needs to be protected against is unemployment, underemployment, and the danger of losing his job. Having a good job is a lot more important to the little guy than absolute price stability. Protection against a low rate of inflation is only important to the rentier class who do not face the danger of unemployment. High unemployment even harms working people who have a secure job because it puts downward pressure on real wages and reduces the bargaining power of workers.”

    Completely agree, as I said in my post.

  40. Gravatar of J J
    19. May 2013 at 10:10

    FEH and Michael,

    It is interesting to argue that unemployment is bad because it puts downward pressure on real wages. We want inflation because in part because real wages are too high (due to nominal wage stickiness). High unemployment may be a result of too high real wages. If NGDP were increased, unemployment would come down, but I’m not sure of what would happen to real wages.

    BTW, I think unemployment is bad and I agree that it is more important than inflation, particularly for the ‘little guy’.

  41. Gravatar of Philo Philo
    19. May 2013 at 11:21

    The relative concepts with respect to monetary policy–looser (easier, more accommodative) and tighter—-are pretty straightforward, but not so the absolute concepts—-easy and tight. These latter imply a neutral baseline, a conception of what sort of monetary policy would be neither easy nor tight, but in-between. Unfortunately most people have no clear baseline in mind, and so their absolute statements about monetary policy are practically without content. When, for example, Ben Bernanke says that Fed policy has been “extraordinarily accommodative,” what neutral baseline does he have in mind? (If, contrary to my suspicion, there actually is a definite answer, the next question would be: of what interest is the information that Fed policy has been easier than *that*?)

  42. Gravatar of Jeff Jeff
    19. May 2013 at 12:08

    @FullEmploymentHawk:

    RBC models tell us how the economy WOULD BEHAVE in the short run if there were no demand shocks, so that output was always at potential output and all short-run fluctuations were caused by fluctuations in the rate of growth of potential output. That permits them to be used as a benchmark against which the performance of actual economies can be compared in order to isolate the effects of demand shocks on the economy in the short run.

    No it doesn’t. What the RBC models tell us is how the RBC models behave. There is absolutely no reason to believe they tell us anything at all about the actual economy. Both the qualitative and quantitative predictions RBC models make are mostly wrong. Just how bad do they have to be before you realize that they are a waste of time?

    Look, I think that most of the readers of this blog think that Scott Sumner knows more about how monetary policy should be run than any of the DGSE modelers. And he didn’t come by his ideas by working out Euler equations. He did it by reading great economists, studying economic history, seeing what has worked before, and looking at what works and doesn’t work in other countries like Japan, Sweden and Australia.

    This is not rocket science or physics. It requires an appreciation of what giants like Milton Friedman, Irving Fisher, Robert Lucas and Axel Leijonhufved wrote about, and it requires familiarity with actual economic history. It does not require the mathematical sophistry of DGSE modeling. In fact, since every DGSE model I’ve ever seen gives rotten policy advice in at least some scenarios, you could make a pretty convincing case that such models subtract from, rather than add to, our understanding of what are good economic policies.

    The profession has gone very badly off track since around the mid-70′s. Milton Friedman by himself produced more economic understanding than all of the RBC and DGSE models put together. Scott works in the same tradition as Friedman, but the profession no longer values that tradition.

  43. Gravatar of J J
    19. May 2013 at 15:26

    Jeff,

    There is a big difference between qualitatively understanding the economy and quantitatively knowing what must be done. For example, Keynes speculated that imposing war reparations on Germany would double hurt the German economy because the transfer of money out of Germany would worsen their terms of trade. It turns out that this may or may not be the case depending in part on the intratemporal elasticity of substitution between home and foreign goods. When is it the case and when is it not?

    Another important point is that we can’t all argue from economic history and our intuition. How do we decide who to follow? How do we ensure that people are making consistent claims based on a consistent economic framework? Sometimes, economists become too interested in math and base predictions on models that have been shaped by what is analytically convenient. But, to suggest that even Euler equations are too much math seems over the top. Without models, how do we even analyze historical events? What are the relevant pieces of data and which data are not relevant?

    Finally, are you suggesting that we just have way too many economists? As I said before, we don’t need every economist to be talking about monetary and fiscal policy. Most economists spend their time slowly adding to a literature that may eventually reveal important insights about the economy.

    I hope that you are at least speaking from some level of expertise and are not simply commenting on a field that you know nothing about besides through newspapers and blogs.

  44. Gravatar of J J
    19. May 2013 at 16:20

    Professor Sumner,

    This goes a long way to showing why the ECB ‘wants a recession’:
    http://carolabinder.blogspot.co.uk/2013/05/europeans-biggest-problem.html

    It seems that the ECB is simply listening to popular opinion, even in Greece and Portugal.

  45. Gravatar of W. Peden W. Peden
    19. May 2013 at 16:26

    J,

    I’m amazed that over 25% of people in Greece consider inflation to be more important than unemployment right now, given that the CPI is falling in Greece. Goodness knows what the Greeks would be like if prices rocketed up to a 0.1% inflation rate!

    25% also happens to be roughly the unemployment rate in Greece right now. This is just tragic, in the Sophoclean sense: awful events and irony all in one terrible mix.

  46. Gravatar of J J
    19. May 2013 at 17:46

    W. Peden,

    Perhaps people (who are still employed) are confusing inflation with changes in real wages. They have stagnant nominal wages, so see any price increases as threatening their survival. They do not realize that more inflation will not necessarily increase the difference between price increases and wage increases. The effect on the real wage of more monetary stimulus is unclear.

    This is a common issue with the fears of inflation in the US. High inflation is not bad because “The price of gas is going up so quickly!!!!!!!”

  47. Gravatar of W. Peden W. Peden
    20. May 2013 at 01:28

    J,

    I think your analysis is probably correct.

  48. Gravatar of 10 Monday AM Reads | The Big Picture 10 Monday AM Reads | The Big Picture
    20. May 2013 at 06:00

    [...] Since ’90 Versus Bunds Counter Buffett (Bloomberg) see also Money isn’t “easy”– A rant (The Money Illusion) • A Small Part of the Brain, and Its Profound Effects (NYT) • Everything Apple Needs to [...]

  49. Gravatar of ssumner ssumner
    20. May 2013 at 10:06

    J, Public opinion polls on inflation are meaningless, as the public doesn’t understand what inflation is. Both the public and I would like to see higher NGDP growth(more income), and we both hope it results in mostly RGDP and little or no additional inflation.

  50. Gravatar of A rant about why the money is not “easy” | Downloadworld A rant about why the money is not “easy” | Downloadworld
    20. May 2013 at 12:45

    [...] Pethokoukis: money is not “easy” – a diatribe http://t.co/goC6qkCQDm Via: themoneyillusion.com – keyword: wonks Counterparties.com [...]

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    20. May 2013 at 14:09

    [...] fundamentals” – Mohahmed El-Erian A rant on why money isn’t “easy” – Scott Sumner Time to start worrying about the recoveryless recovery – [...]

  52. Gravatar of Fed Up Fed Up
    20. May 2013 at 19:38

    “More currency depreciates the value of a euro note for the same reason that a big apple crop depreciates the value of an apple.”

    The amount of currency starts going up 3% per year and the amount of demand deposits denominated in that currency start falling by 7% per year. What happens to its exchange value in the markets?

  53. Gravatar of Schizophrenic investors expect slump: bet on boom – Telegraph Blogs Schizophrenic investors expect slump: bet on boom – Telegraph Blogs
    21. May 2013 at 03:11

    [...] central bank policy is "expansionary", they are wrong. Market monetarist Scott Sumner reminds us in this self-described rant that global money is in fact tight, especially in [...]

  54. Gravatar of Schizophrenic investors expect slump: bet on boom – Telegraph.co.uk (blog) – News Searching Blogs | Fonte English Schizophrenic investors expect slump: bet on boom – Telegraph.co.uk (blog) – News Searching Blogs | Fonte English
    21. May 2013 at 05:42

    [...] is “expansionary”, they are wrong. Market monetarist histrion sociologist reminds us in this self-described rant that orbicular money is in fact tight, especially in [...]

  55. Gravatar of Monetary Policy Round Up | worldofinterest Monetary Policy Round Up | worldofinterest
    21. May 2013 at 08:40

    [...] Sumner has continued to bash zombies. In this case it was another “Money is not easy” rant. Everyone should read Scott Sumner. He has the helpful attribute of being right about monetary [...]

  56. Gravatar of Duke Duke
    21. May 2013 at 12:04

    Money is also tight relative to expectations. Using a model that derives future expectations from the yield curve I illustrate that the difference between Fed Funds and expected rates is reflected in future inflation( http://ssrn.com/abstract=1552504 ). With policy rates zero and rate expectations for the foreseeable future zero, there’s no stimulus. If the markets expect higher future nominal growth, they’ll likely expect future increases in interest rates. That’s not happening in the major economies, so they’re bouncing along on the bottom.

  57. Gravatar of Benny Lava Benny Lava
    22. May 2013 at 08:49

    Scott,

    This is what I was talking about before. You have a number of posts that are super persuasive regarding specific arguments. This is one of those posts. I know you have a sidebar with a few important posts, but I would really like a few posts like these easily linked by the narrative they refute. This really tackles two birds with one stone: easy money and pushing on a string.

    I understand why you wouldn’t do this, but it is almost like putting tabs in a good big book for easy reference and there are certain “narratives” that keep coming up. Looking back on the last 5 years or so market monetarists do as good a job of any of explaining things and also making good predictions.

  58. Gravatar of ssumner ssumner
    23. May 2013 at 18:06

    J, I’ll do a post on that.

    Thanks Benny.

    Sorry everyone, I’m way too far behind to answer all the comments.

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