God save the Brits. When I studied the Great Depression it often seemed like the British (both economists and journalists) were the only ones who understood that money was too tight. Recall that they were the first (Europeans) to bail on the gold standard, and had the good sense to stay out of the euro. It still seems they are ahead of us, at least at The Economist’s Free Exchange and the Financial Times. Here is Ryan Avent:
Britain’s economy will be watched closely given the government’s relatively aggressive plans for fiscal consolidation. Can the Bank of England offset the contractionary impact?
That is exactly the question. (The answer is yes, at least if we are to believe Paul Krugman when he explains away past austerity successes by pointing to easy money policies such as currency depreciation that were pursued concurrently.) But note how rarely American reporters understand this policy interrelationship.
Here is Clive Crook at the FT:
As the monetary economist Scott Sumner has pointed out, Milton Friedman – name me a less reconstructed monetarist – talked of “the fallacy of identifying tight money with high interest rates and easy money with low interest rates”. When long-term nominal interest rates are very low, and inflation expectations are therefore also very low, money is tight in the sense that matters. When money is loose, inflation expectations rise, and so do long-term interest rates. Unreconstructed monetarists ought therefore to agree with Mr Magnus’s main point: under current circumstances, better to print money and be damned.
Admittedly, once that strategic issue is settled, difficult tactical questions arise. For instance, which assets should the Fed buy? As Alan Blinder, a former vice-chairman of the Fed, has noted, the recent policy of replacing maturing mortgage-backed securities on the Fed’s balance sheet with government debt has a secondary effect of reducing downward pressure on risk spreads, which is a pity.
I first did a post on that Friedman quotation back more than a year ago, and have done a dozen since using the exact same quotation. But only in the past few weeks has it started to resonate. Brad DeLong just linked to it a few days ago. As far as Blinder is concerned, he recommended negative rates on excess reserves a few days ago in the Wall Street Journal. Once again, I had to repeat the idea many times before the message broke through.
I apologize to longtime readers for my repetitiveness. But there is a reason; ideas don’t get accepted unless they are repeated over and over again. It is only in the past few months that I have seen other bloggers picking up on the NGDP targeting idea, which David Beckworth, Bill Woolsey and I have been pushing for years.
Next post: “Why I am so egotistical” (Doing a post that pretends to justify repetitiousness, while actually reveling in my ideas get airplay. Time for a post on my biggest mistakes?)