A bad economy doesn’t mean monetary policy is off course

The economy is currently beset by all sorts of problems, mostly related to supply-side problems. And yet, I see no evidence that monetary policy is significantly off course.

There are some reasons to worry that monetary policy is too expansionary. Inflation is above target and wage inflation (a far more important indicator than price inflation) is at 4.6% over the past 12 months. And yet NGDP growth over the past 18 months is running at an annual rate of roughly 3.6% and TIPS spreads are still reasonable, so there’s not much evidence of wildly excessive monetary expansion.

There are some reasons to worry that monetary policy is too contractionary. Employment is still down by 5 million compared to pre-Covid levels. But the unemployment rate has plunged from 14.8% to only 4.8%, a far faster recovery than from any other recent recession. And the solid growth in NGDP and strong TIPS spreads provides no indication of dramatically insufficient monetary stimulus. Total employment seems inhibited by supply-side factors.

A bad economic outcome is not evidence of a bad monetary policy. The economy is influenced by many factors, and monetary policy is just one of those factors.

That’s not to say that monetary policy is perfect; the distortions caused by Covid make it much harder than usual to “read the tea leaves”. But we are not far off course.

Off topic: While on vacation in the Pacific Northwest I read an article about a big surge in baby boomers retiring. An hour later in a small town coffee shop I heard someone say, “Boy, people are retiring right and left.”



46 Responses to “A bad economy doesn’t mean monetary policy is off course”

  1. Gravatar of Danny Danny
    8. October 2021 at 16:36

    Was it the Double R Diner?

  2. Gravatar of marcus nunes marcus nunes
    8. October 2021 at 17:55

    “That’s not to say that monetary policy is perfect; the distortions caused by Covid make it much harder than usual to “read the tea leaves”. But we are not far off course.”
    I believe that´s true. George Selgin´s “correct formula” is being well approximated by the Fed.

  3. Gravatar of Michael Sandifer Michael Sandifer
    8. October 2021 at 18:20


    It apparently doesn’t concern you that S&P 500 futures are predicting a slightly lower level than today through 2024. This, despite a convergence of predictions for a rising discount rate through 2022, as indicated by forward P/Es, and the Hypermind 2022 Q4 NGDP forecast. Both suggest an NGDP growth rate of 4.5% for Q4 of 2022. This is coupled with a 5 year inflation breakeven that’s been flat for months, despite apparent declining short-term real GDP growth expectations.

    Looking at the forward numbers, and considering that both real and nominal GDP growth were roughly back on the pre-recession trend by the first half of this year, one can say that monetary policy is roughly on course, being a bit tight at worst.

    But, this is only in the context of the Fed’s vague average inflation targeting regime, which should be less procyclical than simple inflation targeting, but is still procyclical. I think it would be closer to optimal to slightly increase NGDP expectations for years beyond 2022-2024, since supply-side factors so limit what monetary stimulus can do about the slowdown since early September. That’s my non-heterodox view, and level-targeting NGDP as smoothly as possible would require such forward guidance.

    My heterodox view says that money has been tight since at least 1999 such that wages never fully adjusted, even just before the trade wars began in 2018. And policy tightened in response to the trade wars. So, money is tighter than almost anyone acknowledges, with potential real GDP being higher in outer years, though perhaps not without some supply-side damage caused by the pandemic and trade wars.

  4. Gravatar of ssumner ssumner
    8. October 2021 at 18:51

    Danny, It was in Winthrop WA.

  5. Gravatar of Zachary Zachary
    8. October 2021 at 21:13

    Yep yep.
    Over at ewed, I happen to write a similar post on Friday.


  6. Gravatar of Lizard Man Lizard Man
    9. October 2021 at 02:42

    So, is inflation running ahead of NGDP growth? That seems to be the most sensible way to work through an adverse supply shock, with people working more but getting paid less. But inflation spreads the pain around more widely than unemployment, so I am not sure how sustainable it will be.

  7. Gravatar of Effem Effem
    9. October 2021 at 04:05

    10y inflation breakeven is 2.5%. If we make that 2.3% to approximate PCE and compound current levels at that rate, don’t we end up well above the 2% path?

  8. Gravatar of Brent Buckner Brent Buckner
    9. October 2021 at 05:37

    @ssumner – I think it may be useful *in every post* in which you assess the quality of monetary policy to set the context, such as assessment against the stated regime of average inflation targeting.

    When you note that “There are some reasons to worry that monetary policy is too contractionary,” it seems to me that you are shifting to discussing evidence that under prevailing circumstances the stated regime is inadequate, not that monetary policy is unlikely to hit its stated target.

  9. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    9. October 2021 at 06:25

    O/N RRP facility use, monthly average. This uptake destroys the volume of the money supply dollar for dollar:

    69 ,,,,, April
    290 ,,,,, May
    673 ,,,,, June
    848 ,,,,, July
    1053 ,,,,, August
    1156 ,,,,, September

  10. Gravatar of Todd Ramsey Todd Ramsey
    9. October 2021 at 07:51

    Baby Boomer retirement off-topic? Maybe not.

    Unemployment low at 4.8%. Help wanted signs everywhere. Possible explanatory cause that fits both facts: because there aren’t enough people willing to work at prevailing wages?

    US population aged 58-63 is greater than US population aged 18-23. More people are and will be leaving the labor force than are entering it.

    Some part of the 4.6% wage “inflation” is not actually inflation? It’s a change in the real wage because of a reduced supply of people, including baby boomers, willing to work?

  11. Gravatar of ssumner ssumner
    9. October 2021 at 09:32

    Lizard, You said:

    “But inflation spreads the pain”

    When you pay more for a good, then someone else receives more for selling the good. Inflation doesn’t really spread pain, it merely reflects supply problems.

    Effem, Yes, that is a danger. But I’m not sure the difference is large enough to be statistically significant. I’d say 2.5% is closer to 2.2% on the PCE. But your basic point is correct.

    Brent, Remember that it’s a “flexible” AIT, with equal weight given to employment.

    Todd, You said:

    “Some part of the 4.6% wage “inflation” is not actually inflation? It’s a change in the real wage because of a reduced supply of people, including baby boomers, willing to work?”

    4.6% wage inflation is 4.6% wage inflation. Whether it’s a real wage increase (so far it isn’t) is another question.

  12. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    9. October 2021 at 10:39

    re: “Inflation doesn’t really spread pain, it merely reflects supply problems.”

    Three blind mice. Three blind mice.
    See how they run. See how they run.
    They all ran after the farmer’s wife,
    Who cut off their tails with a carving knife,
    Did you ever see such a sight in your life,
    As three blind mice?

    “The USA is now experiencing a 30 year high inflation rate causing many American families hardship and difficulty with paying monthly food, utility, and other living expenses. Simultaneously, the USA is now also suffering from a 100 year high murder rate”

  13. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    9. October 2021 at 10:47

    Just like Friedman, Sumner is a bad teacher:

    “Friedman’s graduate price theory course was mandatory and notoriously difficult. In 1959, the year Sowell arrived at Chicago, Friedman passed just eight of the seventeen students who took his written examination. According to Friedman biographer Lanny Ebenstein, the course was used to “screen out graduate students who did not measure up to departmental standards.”

    As Jacob Viner said: “You don’t belong in this class”.

  14. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    9. October 2021 at 11:30

    “The income velocity of money — the ratio of GNP to Ml — has behaved differently since 1981 than it had over the previous 30 years. This paper discusses the portfolio approach to money demand, which suggests
    that money demand is more closely related to wealth than to current income. The portfolio theory implies that, when wealth increases relative to current income, income velocity falls, other things the same”

  15. Gravatar of David S David S
    9. October 2021 at 13:20

    Scott, this was an important post, thank you. The Fed is not God, they’re merely a group of people trying to drive a bus full of yammering lunatics without crashing.

    Spencer, I’m honestly confused by your position. You obviously think things are going to hell in a handbasket–but which hell? A stagflationary hell like the 1970’s or a low-growth hell like Japan?
    The former seems unlikely in the context of what seems to be a persistent labor shortage. The latter would require some particularly insane appointments to the Fed.

    I’ll bet you a dollar (or some fraction of a Bitcoin if you prefer) that the next decade resembles the 1990’s. Things ran a little bit too hot NGDP growth-wise but we all had fun with the tech boom. In the U.S. at any rate—Robert Rubin was a red-handed bully in Asia.

  16. Gravatar of Don Don
    9. October 2021 at 16:20

    Why the discussion of employment and unemployment w.r.t. monetary policy? Isn’t NGP the only thing that matters? If the expectation is 4.7% and the target is 4.5%, then monetary policy is too loose.

  17. Gravatar of foosion foosion
    9. October 2021 at 17:20

    “When you pay more for a good, then someone else receives more for selling the good.”

    This is one of the most ignored facts about the economy. Too many focus on the paid part and ignore the received part, even though they have to balance. Perhaps it’s due to the payor blaming inflation and the receiver believing it’s personal virtue rather than inflation that causes the larger receipts.

  18. Gravatar of James Alexander James Alexander
    9. October 2021 at 22:30

    Is “wage inflation” a concept? Wage growth is a thing, surely, but “inflation”?

    Off topic, this Claudia Sahm sounds a bit like you complaining about the mainstream macroeconomics profession. Especially the Summers/Blanchard axis. And defending Powell. And she sounds quite good on monetary policy.

  19. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    10. October 2021 at 05:35

    re: “You obviously think things are going to hell in a handbasket–but which hell?”

    Excessive rates of inflation transfers wealth to the upper income quintiles. The temporary resurgence of Covid interrupted growth. But the shopping parking lots are full. There is no place to park. We’ll rebound in the 4th qtr. The rate-of-change in money flows has bottomed.

    Economic policy is perverse. For 14 years beginning in 1993 the average number of new single family homes averaged 110 ending in July 2007. Then there were never over 100 (in thousands of units) of new single family dwellings built in any month between August 2007 and September 2021.

    The average number of new single family homes then averaged 57 (in thousands of units), for the 13 years between Sept. 2007 and Sept. 2021. That’s a huge shortfall.

  20. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    10. October 2021 at 05:53

    If the monies represented by the deficits are spent on projects which increase productivity and reduce waste, the deficits are beneficial no matter how financed. The initial inflationary effects of bank financing are quickly overcome by improved technology, larger output, and lower unit costs. Debt incurred which reduces unit costs of production and promotes the health and welfare of the population obviously is “good” debt.

    Monetary policy is a blunt instrument, and targeted more towards speculation, than real investment. Reserve Bank credit is narrowly channeled into nonproductive sectors (like transfer payments). Whereas the dispersion of commercial bank credit didn’t exhibit the same Cantillon effect.

    Today, a disproportionate volume of savings is impounded in the banks and dissipated in financial investment.

  21. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    10. October 2021 at 06:32

    Re: “This is one of the most ignored facts about the economy”

    How is that different than Marxism?

  22. Gravatar of ssumner ssumner
    10. October 2021 at 08:03

    Don, Employment is part of the Fed’s mandate. I wish they had an NGDP target, but they don’t.

    James, My views are much closer to Summers than Sahm. Her criticism of Summers seems kind of over the top (and almost insulting). I don’t always agree with Summers on policy, but his views are certainly defensible.

    I saw a recent piece she wrote where she pointed out that Summers favors a higher inflation target, and then asked why Summers is currently worried about inflation. That misses the point that the Fed has not adopted a higher inflation target. So it is worrisome if inflation overshoots 2%. If they had adopted a 4% target then no one would be concerned right now.

  23. Gravatar of James Alexander James Alexander
    10. October 2021 at 09:19

    “I do think we’re in very serious danger of repeating almost all the mistakes of the 1960s and early 1970s,” Summers said

    Really? Not just overshooting 2% a bit but “very serious danger of … ” etc etc?

    Sahm’s views on keeping Powell and Brainard as Chair and Vice Chair, and not replacing Brainard with Powell seemed well thought out.

    Summers still wants to be chair of the fed, imho. He’s a power junkie.

  24. Gravatar of ssumner ssumner
    10. October 2021 at 09:48

    James, I’m less worried about a repeat of the 1970s than Summers, but there is some risk. It’s not like there are no parallels at all.

    Overall, my views on macro are much closer to Summers than to Sahm.

  25. Gravatar of Henry Henry
    10. October 2021 at 10:00

    Yes, the Soviet politburos used to say the same thing.

    It’s called delusion!

    You worked your whole life with very narrow views, so of course You will never change. You will always try to justify it, no matter how bad things are, because psychologically you don’t want to be wrong. You don’t want to be that generation that destroyed American prosperity.

    But your generation did destroy it. And you are wrong. The baby boomers felt entitled. They felt like they didn’t have to work. And here we are.

    Future generations, for the very first time, will be worse off.

    Precisely, because of democrat policies.

  26. Gravatar of Rinat Rinat
    10. October 2021 at 10:13

    Does anyone else notice that Sumner stopped writing about Covid?

    He stopped, because he knows he’s wrong. And he doesn’t want to admit it.

    Remember when he told us that we should all lockdown. That we should force people to stay home, barricade their doors shut, post security guards that punch anyone leaving their homes (like the CCP), and force vaccinate people against their will (like WEF and Biden’s “build back better agenda”)?

    Remember when he told us to listen to the UN, because the UN is a god that is omnipotent and omniscience. Remember when he told us to listen to the apparatchiks who know how to manage our lives best. Remember when he said the virologists who agree with each other are “scientific” and the virologists who don’t agree are “anti-science” or “conspiracy theorists”. Remember when he told us that we should suppress information to coerce people into taking the vaccine?

    Well, how did that work out?

    Singapore is now 85% vaccinated, and they have seen an increase in the number of cases. Israel is 85% vaccinated, and has seen an increase in the number of cases. Filipinos, after two years of lockdown, are worse off than ever before (10,000-15,000 cases per day).

    Colombia is 25% vaccinated, has no quarantine, no mask requirement, and has less than 2000 cases per day.

    Colombia took the approach of the 20,000 scientists who signed the great barrington declaration. The same scientists that Sumner called “conspiracy theorists”.

    America and Australia took Sumner’s tyrannical approach.

    Tell me, which country is in better shape?

    If Sumner so easily dismisses those who disagree with his dogma, then why would you trust him with your money!

    How could you trust this imbecile with running the Fed, when he is so biased that he won’t even consider alternative views.

    This is the type of neanderthal that will destroy your country, not help it prosper.


  27. Gravatar of ssumner ssumner
    10. October 2021 at 11:04

    “Does anyone else notice that Sumner stopped writing about Covid?”

    I did a Covid post today.

    “Remember when he told us that we should all lockdown.”

    No. When did I?

    “Remember when he told us to listen to the UN,”


  28. Gravatar of Lizard Man Lizard Man
    10. October 2021 at 11:59

    “ When you pay more for a good, then someone else receives more for selling the good.”

    Sure, but hasn’t it been the case in the US for the past couple of generations that it isn’t people working for wages that receive that extra money? Granted this may be the first recession caused by a supply shock in the US for a very long time. But isn’t it the case that the monetary authority can react to a supply shock by tightening policy to lower employment and inflation, or can instead can have looser policy that means greater inflation but more employment? I thought that the very nature of a supply shock was that there were fewer goods and services to go around. Hence the central bank can choose to crash the economy, causing lots of people to lose their jobs and in that way driving down demand and inflation, while the people who keep their jobs have more purchasing power than they otherwise would due to sticky wages. Or the central bank can support employment and let inflation rise, and while nominal wages and income might go up, the fact that there are fewer goods and services by definition means that the real value of that income falls, though because fewer people are unemployed, that reduction in real is shared more evenly by the population.

  29. Gravatar of Jeff Jeff
    10. October 2021 at 12:18

    Claudia Sahm said earlier this year that the Fed was “going to the bat for workers” by stoking inflation. Does she think that workers like being paid in Monopoly money?

    Deleveraging and forced liquidations allow workers to acquire high-quality assets despite meager earnings and savings. That was part of the social contract pre-2008.

    Sahm’s Fed rewrote the rules of the game so modern sharecroppers would understand that, no matter how bad the screw-ups of their masters, the plantation owners will never be allowed to fail.

  30. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    11. October 2021 at 05:00

    Crude Oil WTI (NYM $/bbl) Front Month just surpassed 80, @$ 81.14

    Economists don’t know a debit from a credit. Keynesian economists have achieved their objective, that there is no difference between money and liquid assets. An increase in money products while remunerating IBDDs, decreases the real rate of interest, while an increase in savings products increases the real rate of interest.

    FAIT is a policy where the economy is being driven in reverse. It’s the difference between commercial bank credit of yesteryear (affecting more economic sectors), and Reserve Bank credit today (spurring financial investment and suppressing yields).

    Both channels create new money and are blunt instruments, but Reserve Bank credit stimulates a higher degree of speculation from a narrower credit path (more interbank demand deposits, than commercial bank demand deposits).

    It’s a disputation of Friedman’s axiom: “As an empirical matter, low interest rates are a sign that monetary policy has been tight – in the sense that the quantity of money has grown slowly; high interest rates are a sign that monetary policy has been easy-in the sense that the quantity of money has grown rapidly.”

    So we get negative real rates of interest stoking asset bubbles. This reinforces income inequality. It increases domestic violence. The 100 year high murder rates is a math equation.

  31. Gravatar of Justin Irving Justin Irving
    11. October 2021 at 10:45

    The big problem now is not NGDP, we have the best NGDP management, all things considered, that we’ve had at any time in history. Brilliant FOMCing. We have all the supply side issues associated with rolling factory/shipping shutdowns, delayed effects. It’s truly remarkable how robust the logistical system is, however.

    I think this vaccine mandate is obviously having a labor market role, I blame it for the big jobs number miss. Sort of regardless of what you think of the vaccines, if you think the anti-vax community should be GULAGed and replaced with immigrants, whatever; given the constraint that a huge fraction of workers don’t want to be injected, the mandate should be understood as negative, labor-market-wise. Clumsy policy, violates the libertarian-paternalistic directive.

  32. Gravatar of nick nick
    11. October 2021 at 12:17

    I’m sure that small town coffee shop was so eager to have a radical leftist economist there.

    Why don’t you stick to MA, and CA, and EU, and other radical leftist outposts, and leave the good and decent people of NW USA alone in peace. You want to escape the centralization for peace and quiet, and spend your vacation around small towns, but then destroy those towns with your left leaning backward policies.

    The last thing they need is a self righteous carpet bagger telling them how to live their lives, or sending more of their hard earned labor to another supranational organization.

    In fact, you should walk around with a big tattoo on your head that says “Fed Fuck”, “I steal your money”.

    I think people need to be warned of your thievery.

  33. Gravatar of agrippa postumus agrippa postumus
    11. October 2021 at 15:46

    what a clown poor economist manque sumner has become. the fed has spent 30 years suppressing volatility and creating the most massive carry bubble in history, yet there’s nothing so wrong. how about entrenched deflationary trend, the end result of massive debt and carry.

  34. Gravatar of postkey postkey
    12. October 2021 at 02:02

    “You want to escape the centralization for peace and quiet, and spend your vacation around small towns, but then destroy those towns with your left leaning backward policies.”

    Whose policies?

    “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens
    Martin Gilens and Benjamin I. Page
    Each of four theoretical traditions in the study of American politics—which can be characterized as theories of Majoritarian Electoral Democracy, Economic-Elite Domination, and two types of interest-group pluralism, Majoritarian Pluralism and Biased Pluralism—offers different predictions about which sets of actors have how much influence over public policy: average citizens; economic elites; and organized interest groups, mass-based or business-oriented. A great deal of empirical research speaks to the policy influence of one or another set of actors, but until recently it has not been possible to test these contrasting theoretical predictions against each other within a single statistical model. We report on an effort to do so, using a unique data set that includes measures of the key variables for 1,779 policy issues. Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic-Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism. “

    Look, look, over here, it’s the ‘radical leftist economist’ ‘destroying those towns’.
    Don’t look over there at the plutocrats and the M.I.C., there is nothing to see.

  35. Gravatar of Henry Henry
    12. October 2021 at 11:15


    More radical leftists, who identify with Sumner’s democrat (bully) party.

    Do these communists/socialists, open borders, one world government people, realize that we are in competition?

    Or do they live in a fantasy world like Scott?

  36. Gravatar of Henry Henry
    12. October 2021 at 11:23


    More radical leftists escorting a nurse and anesthesiologist out of the premises (armed escort) for not taking the vaccine.

    I wonder if that anesthesiologist is “anti-science”, or a “conspiracy theorist”? He must be one of those “far-right”, “nationalists”, “fascists”, “racists” “big bad white guy” – or what are the other orwellian words they are using in unison now?

  37. Gravatar of ssumner ssumner
    12. October 2021 at 14:22

    Lizard, Yes, you don’t want to tighten during a supply shock.

    Henry, Infowars? Really?

  38. Gravatar of henry henry
    12. October 2021 at 16:01

    Sumner wants you to believe we all live in a bubble. Look at this lancet article that received no press coverage. I wonder if these academics are “anti-science”, or “conspiracy theorists”. Must be another one of those “white supremacists”.

    1. Lancet article noting faulty calculation relative risk instead of absolute risk (against FDA biostatistic policy) in Pfizer efficacy leading to 0.84% (not 84%) actual efficacy, not 95%.

    2. Pfizer Ex VP notes one group in the Pfizer study ends up with five times as many subjects having their data pulled prior to statistical analysis in the test group compared with the control group?


  39. Gravatar of henry henry
    13. October 2021 at 12:16

    Harvard Scientist Martin Kulldorff wrote an article in the spectator titled: “Covid, Lockdown and the retreat of scientific debate”.

    I presume he’s one of those “anti-science”, “conspiracy theorists”, that Sumner keeps talking about. Who knew there were so many? 20,000 conspiracy theorists, all with the title “doctor”.

    He says: “The British Medical Journal is supposed to publish high quality medical research, but it is now printing tabloid gossip and false slander against physicians and scientists voicing views on the pandemic”.


    Sounds a lot like Sumner doesn’t it? No substance. No data. Just mindless negative epithets hurled across the room at anyone who disagrees. It’s sort of like a new…..religion!

    Is the scientific age coming to an end?

    Are we entering a new of pseudoscience?

    Seems likely!

  40. Gravatar of David S David S
    13. October 2021 at 13:33

    Okay, tapering might start in November. I’m not sure how I feel about that because the recovery is still gaining traction–CPI increases be damned. As Scott just noted, “don’t tighten during a supply shock” and certain parts of the supply chain probably need another 24 months to get back to normal. But what’s “normal” now, and what parts of the supply chain are really important? WTI is at $80 a barrel and climbing, but so what?–that means there’s incentive to ship it or pipe wherever it’s in demand and collect payment in nominal dollars.

    Crap I order on Amazon still lands on my doorstep the next day. We really are in the future!

  41. Gravatar of postkey postkey
    13. October 2021 at 14:17

    ” . . . i resigned from british medical journal
    109:21 open quality and i resigned from the
    109:23 lancet
    109:24 because of their roles in this entire
    109:27 fiasco
    109:28 with cersko v2 and particularly after
    109:31 peter dayzak uh published
    109:34 with a with a series of other people in
    109:36 the lancet that this virus was a
    109:38 zoonotic or naturally occurring
    109:40 way back at the beginning of 2020 that
    109:42 that’s not the function of a scientific
    109:44 or medical journal
    109:45 and so i resigned from both of those
    109:47 journals um
    109:49 you know which are which are prestigious
    109:51 journals but they no longer are
    109:53 in my view and are you saying they’ve
    109:55 been bought
    109:57 they certainly act like they have um the
    110:00 new
    110:01 new england journal of medicine to allow
    110:03 bill gates to
    110:04 uh to publish editorials in a new
    110:08 england
    110:08 bill gates may have a lot to know about
    110:12 computer viruses but he knows nothing
    110:14 about human viruses . . . ”

  42. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    13. October 2021 at 15:05

    Prices of basic human needs are rising. And you can blame that squarely on the Federal Reserve authorities.

    “The Federal Reserve’s responsibility for managing the money supply was established at its founding in 1913, as the first sentence of the Federal Reserve Act directed the nation’s new central bank “to furnish an elastic currency.”

    Nobel Laureate Dr. Milton Friedman was right: “Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in OUTPUT.” That includes “supply chain issues” and “labor shortages”.

    “In July 1993, Chairman Greenspan informed Congress that the monetary aggregate, M2, had been “downgraded as a reliable indicator of financial conditions in the economy, ” reflecting the fact that “the historical relationships between money and income and between money and the price level [had] largely broken down.”

    Powell: “the correlation between different aggregates [like] M2 and inflation is just very, very low”.

    Powell and Greenspan just don’t know money from mud pie.

    That’s just incompetence at the highest level. FAIT (flexible average inflation targeting) is FOLLY. Inflation is the most destructive force capitalism encounters.

  43. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    13. October 2021 at 15:28

    Economics is an exact science. As American Yale Professor Irving Fisher posited: “If the principles here advocated are correct, the purchasing power of money — or its reciprocal, the level of prices — depends exclusively on five definite factors:

    (1) the volume of money in circulation;
    (2) its velocity of circulation;
    (3) the volume of bank deposits subject to check;
    (4) its velocity; and
    (5) the volume of trade.

    “Each of these five magnitudes is extremely definite, and their relation to the purchasing power of money is definitely expressed by an “equation of exchange.”

    “In my opinion, the branch of economics which treats of these five regulators of purchasing power ought to be recognized and ultimately will be recognized as an EXACT SCIENCE, capable of precise formulation, demonstration, and statistical verification.”

    And we knew this already: In 1931 a commission was established on Member Bank Reserve Requirements. The commission completed their recommendations after a 7 year inquiry on Feb. 5, 1938. The study was entitled “Member Bank Reserve Requirements — Analysis of Committee Proposal” its 2nd proposal: “Requirements against debits to deposits”

    After a 45 year hiatus, this research paper was “declassified” on March 23, 1983. By the time this paper was “declassified”, Nobel Laureate Dr. Milton Friedman had declared RRs to be a “tax” [sic].

  44. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    13. October 2021 at 15:30

    See: “History and forms. Irving Fisher (1925) was the first to use and discuss the concept of a distributed lag. In a later paper (1937, p. 323), he stated that the basic problem in applying the theory of distributed lags “is to find the ’best’ distribution of lag, by which is meant the distribution such that … the total combined effect [of the lagged values of the variables taken with a distributed lag has] … the highest possible correlation with the actual statistical series … with which we wish to compare it.” Thus, we wish to find the distribution of lag that maximizes the explanation of “effect” by “cause” in a statistical sense”.

    And “The Lag from Monetary Policy Actions to Inflation: Friedman Revisited” 2002

    “We reaffirm Friedman’s result that it takes over a year before monetary policy actions have their peak effect on inflation… Similarly, advances in information processing and in financial market sophistication do not appear to have substantially shortened the lag”

    “At the Dec. 27–29, 1971, American Economic Association meetings, Milton Friedman (1972) presented a revision of his prior work on the lag in effect of monetary policy (e.g. Friedman 1961). His new conclusion was that ‘monetary changes take much longer to affect prices than to affect output’; estimates of the money growth/CPI inflation relationship gave ‘the highest correlation… [with] money leading twenty months for M1, and twenty-three months for M2’ (p. 15)”

    The distributed lag effects of monetary flows have been mathematical constants for > 100 years (contrary to Nobel Laureates Milton Friedman’s and Anna J. Schwartz’s: “A Monetary History of the United States, 1867–1960).

    Monetary flows look like this:
    12/1/2020 ,,,,, 1.26
    01/1/2021 ,,,,, 1.31
    02/1/2021 ,,,,, 1.41
    03/1/2021 ,,,,, 1.51
    04/1/2021 ,,,,, 1.60
    05/1/2021 ,,,,, 1.65
    06/1/2021 ,,,,, 1.78
    07/1/2021 ,,,,, 1.91
    08/1/2021 ,,,,, 1.93
    09/1/2021 ,,,,, 1.91
    10/1/2021 ,,,,, 1.95
    11/1/2021 ,,,,, 1.85
    12/1/2021 ,,,,, 2.09
    01/1/2022 ,,,,, 2.21 inflation spikes
    02/1/2022 ,,,,, 1.79
    03/1/2022 ,,,,, 1.54
    04/1/2022 ,,,,, 1.49

  45. Gravatar of James Alexander James Alexander
    13. October 2021 at 23:39

    Summers appears to be losing it:

  46. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    15. October 2021 at 10:02

    Irving Fisher must be turning over in his grave. Even Milton Friedman bastardized his equation.

    The real impact of monetary demand on the prices of goods and services requires the analysis of “monetary flows”, and the only valid velocity figure in calculating monetary flows is Vt. Milton Friedman’s income velocity, Vi, is a contrived figure (Vi = Nominal GDP/M). It is a “residual calculation – not a real physical observable and measurable statistic.” The product of M*Vi is obviously N-gDp.

    So where does that leave us? in an economic sea without a rudder or an anchor. A rise in N-gDp can be the result of (1) an increased rate of monetary flows M*Vt (which by definition the Keynesians have excluded from their analysis), (2) an increase in R-gDp, (3) an increasing number of housewives or immigrants selling their labor in the marketplace, etc. The income velocity approach obviously provides no tool by which we can dissect and explain the inflation process.

    To the Keynesians, aggregate monetary demand is nominal-GDP, the demand for services (human) and final goods. This concept excludes the common sense conclusion that the inflation process begins at the beginning (with raw material prices and processing costs at all stages of production) and continues through to the end.

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