A slightly off-center perspective on monetary problems.
A few weeks back I did a post on a passage from Lords of Finance, trying to refute the widely held view that Keynes was a great investor. I got some negative feedback from some commenters who knew more than I did. But now I have completed the book, and feel even more strongly about this issue. I’ll start with Keynes, but my real target is much bigger.
In an earlier post I argued that Fed policy almost always reflects the consensus views of economists, and therefore that most economists fail to perceive major monetary policy failures at the time and place they occur. I applied that conjecture to episodes of inflation and deflation. Let’s see if we can take that conjecture even further today.
I’d like to argue that almost every American recession shares two characteristics:
1. Recessions are caused by a slowdown in NGDP growth, which is triggered by tight money.
2. During every recession most economists fervently deny point 1 applies to the current problem.
That’s a pretty bold claim, but what else would you expect from a blog entitled “The Money Illusion?”
It’s never the central bank’s fault. Or at least that’s what I hope to show.
I will argue that there has never been an inflation or deflation that was “blamed” on central bank policy. More specifically, this is my argument:
Undesirable inflations and deflations are never blamed on central banks by the consensus of expert opinion in the country affected, during the period when prices are actually changing. Can you think of any counterexamples?
Here I’ll try a couple analogies to better explain earlier posts on causation and NGDP targeting. As you will soon see, my literary skills are at the 5th grade level.
Even people who are sympathetic to my policy views often have trouble swallowing my thesis that the Fed caused the crash of 2008. In my previous post (which you should read first) I argued that people make unjustified distinctions between “active” and “passive” monetary policy stances. The argument is often that the Fed did not “do anything” that might have caused the crash of 2008. Here I will reprise and extend an argument I used in response to Josh over in Nick’s blog.
