Archive for November 2023


Bill Dudley on money and inflation

This paragraph in a FT article has me confused:

We still have people talking about money supply growth as a big driver of economic activity, when money supply is mostly driven by QE and QT. When the Fed’s doing QE, money supply grows fast; when the Fed’s doing QT, money supply shrinks. And those things may be correlated with economic activity. When you’re doing QE, you’re trying to stimulate the economy; when you’re doing QT, you’re trying to restrain the economy. But it’s not like money growth is directly responsible.

I don’t follow this. QE means increasing the monetary base. So Dudley is saying:

1. QE leads to a larger money supply.

2. QE is expansionary for the economy.

3. Money growth doesn’t matter.

The first two claims represent the classic monetarist position. The base impacts the broader money supply. Check. Increases in the base are expansionary for the economy. Check. But somehow the money supply doesn’t matter? Does the monetary base matter? If not, why is QE expansionary?

This all seems like word games. When thinking about causality one must think in terms of policy counterfactuals, otherwise any statement is simply incoherent. We saw a huge rise in M2 during Covid. Dudley seems to think that was caused by QE. Fine. But what about a counterfactual where the Fed does just enough QE to allow for only a small rise in M2. (Much less than they actually did.) Is Dudley denying that that counterfactual policy would have been less inflationary?

In the rest of the interview, Dudley insists that monetary policy is all about interest rates. That’s just wrong. Did low interest rates cause the German hyperinflation? Or was it printing a zillion German marks worth of currency?

PS. Later, Dudley says:

Continuing with QE did two things. Number one, it added more deposits to the banking system and probably created more temptations for banks like Silicon Valley Bank to take on excessive interest rate risk in their portfolio.

Now I’m even more confused, as that also sounds like monetarism. The monetary base matters, and bank deposits matter, but M2 doesn’t matter? M2 is composed of currency and bank deposits. Can someone help me out?

McMansions, cable news, and Capitol Hill High School

Give the people what they want.

Systems such as free markets and democracy are good at giving the people what they want. Some people don’t like that fact. I’ll give a few examples, but there are many more that could be cited.

When I Iived in Newton, MA, I used to enjoy walking around and looking at the gorgeous old homes. Newton is one of America’s most beautiful towns. When I travel to fast growing sunbelt cities, I now see an endless sprawl of ugly McMansions. Hideous neo-Palladian monstrosities. Mock Georgian excrescenses. An orgy of nouveau riche bad taste.

But these houses are not being built for me—architects are giving the people what they want. Don’t blame the architects; they are capable of designing whatever people want. You still see beautiful homes being built in places like Newton, or Laguna Beach, or Irvine. The “problem” is that America has a vastly enlarged upper middle class, and the newest members tend to have poorer taste than the small upper class of the early 20th century.

When I was young, TV news was somber and tasteful. Now you see popular networks full of blond bimbos screeching nonsense at the top of their lungs. But don’t blame the networks, they are giving the people what they want.

When I was young, politics was a serious business. Party officials acted at gatekeepers, assuring that lunatics would not receive their party’s nomination for national office. (Local government has always been messy.) Since then, America has become more democratic, and we are finding that what voters want most of all is for Congress to resemble their experience in high school:

1. Remember the mean girls that slut shamed each other?

2. Remember the lazy guy that pulled the fire alarm because he wasn’t prepared for the test?

3. Remember the devious guy that sucker punched people in the kidneys when they weren’t looking?

4. Remember the dumb guy who challenged the fat guy to a fight in the back alley?

Welcome to Capitol Hill High School.

The elites are appalled by all of this. But you cannot deny that we are getting what the public wants.

The founders put a 35-year age minimum on the presidency to prevent the election of a high school student. Doesn’t matter. Next year, a high school student will be elected president of the United States. We’ll get what we want—good and hard.

PS. Want more examples? Hollywood films. Reality TV. Professional wrestling. The list is endless.

Trumpistas and the Fox News bubble

I have a new commenter named Nikita, who is just as confused about Trump as many of my other commenters. Look how he starts out:

Anyone impartial can see that Trump has been treated unfairly.

The argument about inciting violence at January 6th is not logical. His speech on that day did not call for violence, and the people at the protest were unarmed.

The rest is just as bad.

Almost every pro-Trump comment I’ve received over the past 7 years is similar to this one. The Trumpistas live in a Fox News bubble where they are shielded from the real world, from any news that would make their hero look bad.

Treated unfairly? Any normal person that did what Trump did would already be in prison. Don’t believe me? Try lying to Federal officers about a huge hoard of top secret documents that you possess when they ask for them back, and see what happens.

Of course the attack on the Capitol was violent—at least one person died and many others were injured. We have film of people forcing their way into the building with battering rams. I know that Tucker Carlson denied this, but the rioters did carry guns, as well as knives and other weapons. But on the fringes of the right wing internet, it was just a walk in the park. Those images you saw on TV? Don’t believe your lying eyes.

There was a thorough investigation of the riot, and the results showed that Trump clearly supported the violent attack. For several hours, he refused to call in law enforcement when asked to do so. Told of death threats, he responded that people like Pence were getting what they deserved.

Trumpistas don’t know any of this because they live in an epistemic bubble, merely receiving happy talk from Fox, or loony conspiracy theories from the more extreme right wing portion of the internet. “It was staged by antifa!”

When you come on here with your nonsense you are not helping your cause, you are just making me think that you are more stupid than you actually are. In real life you are probably not a stupid person, maybe quite intelligent, but your epistemic bubble has made you stupid about politics. I’m probably also stupid about politics, but that’s no excuse for your actions.


While there are many ways of thinking about the world economy, I find it helpful to think in terms of two superpowers.

America is a nominal superpower, and American monetary policy has a disproportionate impact on the world’s nominal economy. China is a real superpower, and its fiscal policy has a disproportionate impact on the world’s real economy.

David Beckworth has written extensively on the US as a monetary superpower. But where does that come from? After all, the GDP of the EU is roughly comparable to that of the US.

The monetary dominance from the US comes from a variety of factors, but the most important is the fact that many countries have currencies that are at least loosely pegged to the dollar. Other factors include the high proportion of international loans that are denominated in dollars, the fact that much foreign trade is priced in dollars (even between two non-dollar economies), and the fact that most foreign reserves are in the form of dollar assets.

Because the US is a monetary superpower, we have a disproportionate effect on all sorts of nominal variables, all over the world. And that matters because many wages and prices are sticky.  When the global dollar economy is unstable, it makes the global real economy unstable as well.

China is at a stage of development that is extremely commodity intensive, as it builds up its capital stock. As a result, it tends to consume 40% to 50% of many key commodities, such as cement, steel, copper, etc. Coal is also very important in China.

Chinese fiscal policy (broadly defined to include government credit policies that affect state and local governments and state-owned banks) has a big impact on countries such as Brazil and Australia, which export commodities, as well as Germany, which exports the sort of capital goods that China needs to develop. The Chinese fiscal stimulus of 2009 (as well as monetary stimulus) helped to push the global economy out of recession.

American monetary policy can be a problem for several reasons. First, we might have a policy that is inappropriate for the US economy, causing unstable NGDP (as in 2008-09). That shock impacts the entire world. Second, we might have a policy that is appropriate for the US, but is associated with a dramatic real appreciation or depreciation in the US dollar exchange rate.

For example, the tech shock of the late 1990s appreciated the real value of the US dollar in forex markets, and this overvalued the currencies of many dollar-oriented economies, from Southeast Asia to South America to Russia. Many countries would be better off having a looser link to the dollar, but that may be hard to do if they rely on dollar-denominated debt.

Chinese business cycles cause instability in commodity-oriented economies, and also places like Germany, which exports lots of capital goods to China. The US is less affected.

I’m not sure this post has anything new, except perhaps the nominal superpower/real superpower framing.

Pot is less partisan

In Ohio, the pro-choice position passed by an almost equal margin on abortion and pot. On closer inspection, however, pot did relatively better than abortion in GOP areas, and vice versa. There is a significant segment of pro-pot Republicans and anti-pot Democrats, more than on abortion: