This David Beckworth tweet asks an interesting question:

If inflation had stayed stable at 2%, this question would have a simple answer. In that case, changes in the money supply growth rate would reflect changes in real money demand. In other words, the Fed would have been accommodating shifts in money demand with equal changes in the money supply growth rate.

It would also be easy to provide a simple explanation if inflation were perfectly correlated with the money supply growth. In that case, changes in money growth would reflect exogenous changes in monetary policy, which destabilized the price level.

In this case, the truth is somewhere in between. Inflation rose sharply in 2021 and has fallen off a bit in recent months, but the change in inflation is much smaller than the change in money growth. This means that most of the change in money growth reflects the Fed accommodating a shift in the real demand for money, and a smaller portion reflects an exogenous monetary policy that caused inflation to rise sharply and then fall back somewhat.

Here I’d like to focus on the shift in real money demand, which explains most of the pattern we observe in the graph. Why did the public wish to hold larger real cash balances in 2020 and 2021, and why has the real demand for cash balances fallen off somewhat in recent months?

The answer seems clear. Nominal interest rates plunged from 2.5% to zero during the Covid crisis of March 2020, and nominal interest rates rose sharply during 2022. The fall in nominal interest rates sharply increased the demand for real cash balances (although other factors such as stimulus checks might have also played a role.)

With the recent rise in nominal interest rates, investors are moving from relatively lower yielding bank accounts to higher yielding alternatives.

I don’t pay much attention to the monetary aggregates, as I believe the Fed mostly accommodates shifts in money demand. One counterargument is that those who do focus on the monetary aggregates saw the inflation problem before the rest of us.

I would respond as follows. If the Fed had adopted an appropriate monetary policy during 2020 and 2021, the money supply still would have risen extremely rapidly, albeit a bit less rapidly than it actually did. And in 2022 the money supply growth rate might well have fallen more quickly. If that had occurred, those who focus on the money supply growth rate would have warned about an inflation crisis that (by assumption) never occurred.

There are certainly occasions when the money supply gives an accurate read on the stance of monetary policy, or at least the direction of a policy shift. Nonetheless, I find other indicators to be more useful, on average. (But not the Phillips Curve!!)

PS. Keep in mind that while the 30% M4 growth rate did accurately signal an upsurge in inflation, it did not give us any useful information on how high inflation would get.

. . . is the price of their toys.

America and China should stop spying on each other because it’s a waste of money.

If one side refuses to stop, the other side should unilaterally cease spying.

Grow up. Stop playing with balloons.

Update: Check out this Reason article:

On Saturday, the F-22 scored its first-ever victory against an airborne adversary when it shot down…a balloon.

There may not be a better metaphor for the costly grandiosity of the American military than the use of a multi-million-dollar fighter jet to dispatch an unarmed, unmaneuverable opponent. But the fact that the F-22 had never won a dogfight before its decisive victory over what may or may not have been a Chinese spy balloon is a nice illustration of why the United States has the world’s most expensive military by a massive margin.

In short, it’s because the Pentagon buys lots of expensive toys that have no use.

Also from Reason magazine, a rare voice of sanity:

The balloon in question is absolutely massive, with “an undercarriage roughly the size of three buses,” as The New York Times put it. This would be an absolutely bonkers way to spy on the United States—especially since the images it picks up are reportedly no better than those it can obtain through satellites. One defense official said, as summarized The Washington Post, that the images a balloon like this could obtain “wouldn’t offer much in the way of surveillance that China couldn’t collect through spy satellites.”

Anyone on the ground could see the balloon in the sky without any sort of specialized equipment. To believe this was meant as a secret spycraft, you’d have to believe the Chinese authorities are just absolute morons, which (whatever else they might be) clearly isn’t true.

Bloomberg:

The US labor market burned red-hot in January as hiring unexpectedly surged and unemployment fell to a 53-year low, defying recession forecasts and adding pressure on the Federal Reserve to keep raising interest rates.

Nonfarm payrolls increased 517,000 last month after an upwardly revised 260,000 gain in December, a Labor Department report showed Friday. The unemployment rate dropped to 3.4%, the lowest since May 1969 and average hourly earnings grew at steady clip.

May 1969? Ah yes, I recall eighth grade.

“bUt 2 neGAtiVe GDP qUArtErs Mean rECesSioN”

Please wake me up when the tight money starts.

Recall the metaphor “shooting ducks in a barrel”? It’s the phrase I think of when I see thoughtful progressives criticize the excesses of wokism. Their critiques are so obviously correct it’s hard to believe that anyone disagrees. So do the ducks ever shoot back? Are there any thoughtful rebuttals?

And yet we are told that the woke have taken over almost all of our key institutions.

[I suppose something analogous has happened on the right. Almost all thoughtful conservatives have written highly persuasive critiques of Trump, and yet Trumpism has taken over the GOP.]

These progressive critiques of woke excesses almost write themselves. I mean, how hard is it for an intelligent intellectual to write an op-ed full of stuff like this (From Nicholas Kristof):

As for my friends who are homeless, what they yearn for isn’t to be called houseless; they want housing.

Or this (from Freddie deBoer):

The basic stance of the social justice set, for a long time now, has been that they are 100% exempt from ordinary politics. BlackLivesMatter proponents have spent a year and a half acting as though their demand for justice is so transcendently, obviously correct that they don’t have to care about politics. When someone like David Shor gently says that they in fact do have to care about politics, and points out that they’ve accomplished nothing, they attack him rather than do the work of making their positions popular. Well, sooner or later, guys, you have to actually give a shit about what people who aren’t a part of your movement think. Sorry. That’s life. The universe is indifferent to your demand for justice, and will remain so until you bother to try to change minds. Nobody gives you what you want. That’s not how it works. Do politics. Think and speak strategically. Be disciplined. Work harder. And for fuck’s sake, give me a simple term to use to address you. Please? Because right now it sure looks like you don’t want to be named because you don’t want to be criticized.

Or Matt Yglesias:

Language is arbitrary and always changing, so personally I find “getting mad at language change” to be one of the lowest forms of reactionary politics. At the same time, it’s worth just applying a little bit of common sense to the question of who is and isn’t included by saying “practicum” instead of “field.” Highly educated people and white-collar workers who spend a lot of time bored at the office staring at computer screens and reading articles are well positioned to have large and flexible vocabularies. We are used to learning new words and learning how to use them.

I am quite fluent in why we don’t characterize non-white people as “minorities” anymore, and even why affirmatively characterizing them as “people of color” is in favor rather than saying “non-white,” which tends to center whiteness. I know what it means to “center” something. I know that URM stands for under-represented minorities, and that we tend not to spell it out because “minorities” is out of favor. I also know what URM means (not Asians) and how URM is distinguished from BIPOC. I don’t talk about third-world countries.

I know these things in large part for the same reason I know how to tie a bow tie. And while everyone knows about Skull & Bones, I also know about Scroll & Key and can tell you which school has eating clubs. But while there may be merit to cultivating a set of esoteric practices for the sake of maintaining a national (or these days, increasingly, global) elite class that can recognize its fellow members, that’s like saying (à la John Rawls) that there may be reasons for even egalitarians to support a certain amount of inequality.

These elite institutions and codes of manners are not egalitarian, not just because manners are insufficient but because their purpose is to be inegalitarian. Changing “field” into “practicum” doesn’t include more people — it’s a new means of excluding people whose information is out of date.

Relative to these thoughtful progressives, I am skeptical of many left-of-center public policies. But even if became converted to progressivism, my view of wokism would not change at all. In fact, I might become even more critical, as they would be hurting my cause.

Again, here’s Yglesias:

Some old school progressives seem to believe that wokism is a sort of secret plot by the neoliberal elite to divert attention away from economic inequality. That’s probably nonsense, but in some respects wokism does serve the material interest of the neoliberal elite, by making voters turn away from left wing political parties (not just in the US, but throughout the world.)

Here’s Freddie deBoer:

If you’re looking around online for criticism of Musk, you’ll find more in terms of pure volume that engages in culture war – going after him for the dumbshit rightwing memes he shares – than that which criticizes the position of billionaires in our economy, their disproportionate influence on our political process, and the connection between their riches and the poverty of others. This is a pretty effective gloss on the poverty of progressive priorities right now; even with one of the richest men in the world, people can’t look past culture war and see the structural problems underneath.

Montaigne pointed out that the barbarians that conquered Greece had a disdain for intellectuals. Surprisingly, they decided not to burn Greece’s libraries. One of their leaders pointed out that Greece was their enemy and that their intellectual pursuits would keep the Greeks from pursuing the sort of “vigorous and soldierly” lifestyle that would make them formidable military foes. I don’t know if Trump is funding the woke movement, but if he’s not then he’s even dumber than I thought.

PS. And it isn’t just progressives that get this point:

PPS. The Economist also sees how the scolds on the left are their own worst enemy. Remember when being left wing was cool?

The left once drew energy from scorning authority and bourgeois convention. But as it becomes America’s enforcer of social norms, it increasingly treats the arts as a tool for instruction. As a result it is surrendering what puts the arts in society’s vanguard, the capacity to question and shock.

For years I’ve been warning that reckless fiscal policy (under Trump and Biden) would lead to future tax increases. And for years I’ve been attacked as an old fogey who doesn’t understand that we are in a new era of zero interest rates, a new era of free credit forever.

Here’s Noah Smith:

Monetary policy is about aggregate demand. Fiscal policy is about efficiency. The profession made a huge mistake in conflating the two policies.

PS. There are a few signs the economy might actually be speeding up:

Vacancies at US employers unexpectedly increased at the end of 2022, illustrating a solid appetite for labor that the Federal Reserve sees as one of the last hurdles to bring down inflation.

The number of available positions climbed to a five-month high of just over 11 million in December from 10.4 million a month earlier, the Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, showed Wednesday. The increase was the largest since July 2021 and mostly reflected a jump in vacancies in accommodation and food services.

(While I’m doing my annoying “I told you so” routine, I might as well add that I ridiculed those who claimed two falling quarters of GDP meant we were in recession during early 2022. I don’t recall any previous recessions with record job openings.)

Tyler Cowen has a post discussing the possibility of the economy reheating, and has this to say:

Another possible pathway for these scenarios involves interest rates. During a normal disinflation, the Federal Reserve raises rates and keeps them high for a long period of time while the economy adjusts slowly — often passing through recession. But inflation has fallen more rapidly than expected, and so the market may expect the Fed to lower interest rates sooner than planned. And an expected cut in interest rates can encourage expansionary pressures just as much as an actual cut in interest rates.

It is a funny world in which slow inflation can cause faster inflation. It’s the logic of expectations that makes it possible, albeit far from certain.

Of course this would not be a case where low inflation is directly causing high inflation. Rather, if this happened it would be a case of the Fed looking at inflation when it should be looking at NGDP growth, and wrongly concluding that monetary restraint is no longer needed. Persistently excessive inflation is always and everywhere a monetary policy failure.