Ends, not means

I get tired of the endless and meaningless debate about where the Fed should set interest rates, or whether they should be doing Quantitative Tightening. What matters is the policy regime. Where does the Fed want the price level to be 5 years from now? How about NGDP? (FAIT would have done that. What a pity it was dropped.)

Today, the Fed is like a wandering sailboat. When pushed off course by the wind, there’s no attempt to get back on course. No one knows its destination. “We’ll try 75 basis points and see where we are.” Good luck with that.

A year ago I suggested that if we had a recession, it would most likely be caused by an excessively expansionary monetary policy. Commenters were perplexed. Wasn’t the previous recession caused by tight money? Yes it was, but ask yourself what sort of policy failure makes a switch to tight money more likely? Now do you see my point?

Over the past year, we have had an overly expansionary monetary policy. And while a recession is far from inevitable (they are nearly impossible to predict), almost any reasonable person would now judge the risk of recession to have increased sharply. This is exactly what I was warning you about.

A sensible policy would be to set a clear path for the nominal aggregate being targeted, and commit to come back to that path after missing the target. Commit to do “whatever it takes” to achieve the target path. This recent article in The Economist reminded me of the importance of whatever it takes:

In 2012 Mario Draghi, then the head of the bank, made an impromptu promise to do “whatever it takes” to save the euro. According to research by Michael Ehrmann of the ecb and Alena Wabitsch of Oxford University, the words generated high traffic on Twitter among non-experts, suggesting they had cut through. The genius of the statement, other research suggests, was that it focused on the end (“preserve the euro”) rather than the means (“buying bonds”), which is easier for the public to understand.

Focus on the ends, not the means. Until you have a clear goal, the policy instruments won’t be very effective.



31 Responses to “Ends, not means”

  1. Gravatar of marcus nunes marcus nunes
    10. July 2022 at 13:02

    Since, in practice, the Fed has no target, it can adopt a strategy!

  2. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    11. July 2022 at 04:54

    It’s simple. Lending by the banks is inflationary. Lending by the nonbanks is noninflationary. The fallacious Gurley-Shaw thesis has run its course. It destroyed velocity (resulting in secular stagnation).

    re: “The 1990/91 recession permanently lowers the level of RGDP”

    The rate of change in bank debits went negative for the first time since the GD.

    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].

    Contrary to professional economists, banks aren’t intermediaries. Banks don’t lend deposits. Deposits are the result of lending. In the circular flow of income, all bank-held savings are lost to both investment and consumption.

  3. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    11. July 2022 at 05:02

    “Focus on the ends, not the means”

    You have it exactly backwards. The FED no longer has the “tools” to control N-gDp. The money supply can never be properly managed by any attempt to control the cost of credit.

    The effect of the FED’s operations on interest rates is indirect, varies widely over time, and in magnitude. What the net expansion of money will be, as a consequence of a given injection of additional reserves, nobody knows until long after the fact.

    The consequence is a delayed, remote, and approximate control over the lending and money-creating capacity of the payment’s system.

  4. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    11. July 2022 at 05:27

    see: June 03, 2022 “Understanding Bank Deposit Growth during the COVID-19 Pandemic”

    “the deposits may leave the banking system if the holder of the deposits exchanges them”… “in the Federal Reserve’s Overnight Reverse Repurchase (ON RRP) facility.”

    The problem is that the injection of new money had no precedent. It was the largest increase in the money supply ever.

  5. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    12. July 2022 at 05:46

    “The Gurley Shaw thesis held that near-monies such as deposit liabilities of savings and loan associations, savings banks, and other financial intermediaries which were outside the jurisdiction of the Federal Reserve System-rendered monetary policy per se useless as an anti-inflationary weapon. In particular, Gurley and Shaw argued that the Federal Reserve could not stop inflation because it could not control nonbank financial intermediaries and thus could not limit the creation of near-monies that were regarded as effective substitutes for Ml.”

    That’s the pervasive error that characterizes the Keynesian economics, that there is no difference between money and liquid assets. No, banks aren’t financial intermediaries. They are credit creators.

    The conclusion is tantamount to saying, “don’t save money” as savings (which we don’t have enough of) adds to “L” and therefore has an inflationary bias, when in fact, savings (a large portion of “L”) is evidence of money that has already been saved/spent/invested.

    In the circular flow of income, unless savings are expeditiously activated and put back to work, a dampening economic impact is generated (secular stagnation).

  6. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    12. July 2022 at 07:34

    “Under the new (ample reserves) regime, the stance of monetary policy depends primarily on where the Board sets the administered rates it pays on bank reserves and reverse repos.”
    The Menace of Fiscal Inflation – Alt-M

    That deals velocity a double whammy.

  7. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    13. July 2022 at 05:32

    Daniel L. Thornton, May 12, 2022 agrees with me:

    “However, on March 26, 2020, the Board of Governors reduced the reserve requirement on checkable deposits to zero. This action ended the Fed’s ability to control M1. In February 2021 the Board redefined M1 so that M1 and M2 are very nearly identical. Consequently, it makes little sense to distinguish between them. In any event, the checkable deposit portion of M2 cannot be controlled now because there are no longer reserve requirements on these deposits. Here is the reason the Fed cannot control these deposits.”

  8. Gravatar of George George
    13. July 2022 at 06:01

    Anyone see the documentary ‘2000 Mules’ that proves the Democrats rigged and cheated the 2020 election yet?

    Or is the narrative still TDS?

  9. Gravatar of George George
    13. July 2022 at 06:16

    After decades of trying to play Machiavelli advisor to a satanic cult that controls national currencies worldwide…

    After decades of being laughed at and mocked by said cult for believing the purpose of the Fed and other central banks is ‘noble’ and ‘to protect society’ from the dangers of free enterprise, instead of financing unspeakable horrors (like NY Fed sending billions in cash pallets to Iraq early 2000s) after decades of failure after failure after failure, clinging to a figment of one’s narcissistic imagination that ‘if I were dictator over money printing THEN the world will finally ‘work properly”, just one question for all you arrogant tinpot dictator wannabes:

    Was the money worth it?

  10. Gravatar of George George
    13. July 2022 at 06:29

    Why did Larry Summers fly with convicted child trafficker Ghislaine Maxwell to pedophile Epstein Island on at least four occasions, including once in 1998 when Summers was United States Deputy Secretary of the Treasury and at least three times while Harvard president?


    What is the REAL core of how to become ‘powerful’ in the whole fake money criminal enterprise?

  11. Gravatar of Steve Steve
    13. July 2022 at 06:43

    A year ago I suggested that if we had a recession, it would most likely be caused by an excessively expansionary monetary policy.

    Too bad they didn’t pass Build Back Better. You know, to avert recession. Bet the Fed would’ve monetized that mofo. /sarc

  12. Gravatar of ssumner ssumner
    13. July 2022 at 07:56

    George, Like you, I learn about deep dark conspiracies by going to the movies.

    You said:

    “Anyone see the documentary ‘2000 Mules’ that proves the Democrats rigged and cheated the 2020 election yet?”

    I haven’t seen that one, but I enjoy James Bond, Mission Impossible and the Bourne Identity.

  13. Gravatar of Gene Frenkle Gene Frenkle
    13. July 2022 at 11:46

    The fact the dollar is at parity with the Euro in the face of inflation is more evidence the Housing Bubble/Financial Meltdown was the result of an underlying energy crisis…because we had a spike in CPI in 2008 while the the Euro peaked against the dollar.

  14. Gravatar of ssumner ssumner
    13. July 2022 at 12:56

    Gene, There was no housing bubble. Read Kevin Erdmann’s book.

  15. Gravatar of Gene Frenkle Gene Frenkle
    13. July 2022 at 13:38

    Sumner, I see 2001-2008 as the best investors passed on cheap credit because they believed the economy was fundamentally unsound. So capital searches for yield in fiat currency economies and so the capital ended up in the hands of the worst investors such as graduate students and Subway franchisees and $300k mortgages hoping to make $50k and Vegas casinos and Miami condos. So in 2007/08 record high energy prices resulted in a weak dollar because America is an energy intensive consumer spending economy that didn’t have a solution to high energy prices. Right now the EU is experiencing high energy prices with suboptimal solutions while everyone knows America can drill itself out of any energy crisis once the markets stabilize.

    As evidence we didn’t have a Housing Bubble one could point to the fact Miami condos and Vegas casinos are booming now just like 2001-2008 and we aren’t in a bubble, but I still believe those two markets don’t necessarily reflect an overall sound economy and just reflect a growing economy which could be due to sound investment or malinvestment like in 2001-2008. Vegas is the superior leading indicator because Miami condos attract a lot of foreign investment.

  16. Gravatar of Gene Frenkle Gene Frenkle
    13. July 2022 at 14:05

    I will add the weak dollar from 2001-2008 did result in more exports even as we hemorrhaged manufacturing jobs. So if I told someone in 2000 that we will have a weak dollar in 2007 would that person believe we would have millions fewer manufacturing jobs than we had in 2000?? Canada’s and UK’s manufacturing jobs moved with the strength/weakness of their respective currencies.

  17. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    13. July 2022 at 16:03

    There are always “bubbles”. They represent an excessive expansion of the money stock relative to the goods and services produced. They depend upon Gresham’s law, “a statement of the least cost “principle of substitution” as applied to money: that a commodity (or service) will be devoted to those uses which are the most profitable (most widely viewed as promising).

    Contrary to Bernanke: “a flawed and over-simplified monetarist doctrine that posits a direct relationship between the money supply and prices”, there is a perfect relationship between money flows, prices, and real output.

    But the current administration denies this: Powell: “The connection between monetary aggregates and either growth or inflation was very strong for a long, long time, which ended about 40 years ago”.

    The GFC disproves Bernanke and Powell. Bernanke turned otherwise safe assets into impaired assets.

    M1 NSA money stock peaked on 12/2004 @ 1467.7. It didn’t exceed that # until 10/2008 @ 1514.2

    Dec. 2004’s money #s weren’t exceeded for 4 years. That is the most contractive money policy since the Great Depression. It coincides with the end of the housing bubble, and the peak in the Case-Shiller’s National Housing Index in the 2nd qtr. of 2006 @ 189.93.

  18. Gravatar of TravisV TravisV
    14. July 2022 at 10:16

    Prof. Sumner and/or Marcus,

    Could y’all please explain why both the (Ukraine-ravaged?) Euro AND the (less Ukraine-ravaged?) Yen have weakened relative to the U.S. dollar?

    Could it be that in both cases, the weakness is primarily driven by something other than the war in Ukraine?


  19. Gravatar of ssumner ssumner
    14. July 2022 at 21:58

    Travis, I don’t have an explanation for the weak yen.

  20. Gravatar of TravisV TravisV
    15. July 2022 at 05:04

    Prof. Sumner,

    What about the Euro? Is that weakness primarily due to the (supply-side) war in Ukraine? Or (demand-side) less of an expected slowdown in NGDP relative to the U.S.?

  21. Gravatar of Student Student
    15. July 2022 at 05:17


    Have your views changed at all over the last year about monetary offset being basically automatic?

  22. Gravatar of ssumner ssumner
    15. July 2022 at 08:20

    Student, No, but I’ve never viewed it as automatic, just the base case assumption.

    Fed policy was too easy in late 2021, but not because of fiscal policy, rather because of a misguided theory that we should drive unemployment as low as possible and not make FAIT symmetric.

  23. Gravatar of TallDave TallDave
    15. July 2022 at 12:16

    5% NGDPLT would mean negative 5% RGDP right now

    secular stagnation has become secular contraction across the OECD

  24. Gravatar of TallDave TallDave
    15. July 2022 at 12:21

    George, please don’t listen to those crazy people on (checks notes) the Wisconsin Supreme Court. Don’t worry, you’ll be given clear instructions on why the next candidate is even worse when the time comes.

  25. Gravatar of Kester Pembroke Kester Pembroke
    16. July 2022 at 05:49

    I’d love to know why they think setting interest rates isn’t artificial.

    The free market position is that money and credit is very easy to create and therefore should cost next to nothing. That stops asset prices being *suppressed* artificially and is a market signal that we should produce more of those assets.

    Housing for example.

  26. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    16. July 2022 at 07:06

    “On The Fed’s (In)Ability to Affect Interest Rates” Dan Thornton

    “The FED does not control the federal funds rates with open market operations as economic textbooks and some economists assert. It never has. Indeed, I’ve shown this is impossible here)”

  27. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    16. July 2022 at 07:31

    “Some Thoughts on Inflation and the Fed’s Ability to Control It”
    Dan Thornton

    “The monetary theory of inflation is based on the belief that there is a direct causal link between money and inflation.”

    Money has no significant impact on prices unless it is being exchanged.
    Link: http://www.philipji.com/riddle-of-money/

    Bank-held savings have a zero payment’s velocity (like remunerated IBDDs which have little reserve velocity).

    The only way to track R-GDP and prices was to track required reserves (as reserves were driven by payments). That’s how I predicted the GFC. As Dr. Richard Anderson pointed out: (11/16/06 “Since no one in the Fed tracks reserves”).

    There was a perfect connection between required reserves and both R-gDp and prices (which nobody knew). Required reserves was the monetary base, the money multiplier (even though the DFIs satisfied 85 percent of their reserve requirements via applied vault cash).

    Maybe that’s the reason people denigrated monies influence. You don’t get the same correlation coefficient with just the aggregates.

    Milton Friedman’s monetary base included currency outside the banks. However, an increase in the currency component is contractionary (unless offset by Fed credit). Milton Friedman was one-dimensionally confused.

    Thornton: “this means that even if the Fed were to drastically reduce its balance sheet, the checkable part of M2 may not contract as much as it would if reserve requirements had remained in force.”

    Now, Powell has eliminated them. The FED is operating without an anchor or a rudder.

  28. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    16. July 2022 at 07:50

    “Misleading monetarist views” – Marcus Nunes

    “We must take into account money demand (or its inverse, Velocity)”

  29. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    16. July 2022 at 08:25

    Both the 10mo roc in DDs and the 24mo roc in DDs crater in November (but that time series is not as accurate as required reserves).

    Link: https://www.yardeni.com/pub/monetagg.pdf

    See: Figure 24 Demand deposits as a percentage of M2

    That gives an extra monetary punch.

  30. Gravatar of ssumner ssumner
    16. July 2022 at 08:49

    Talldave, 5% NGDPLT would mean negative 5% RGDP right now”

    That’s one of the silliest claims I’ve ever encountered.

  31. Gravatar of TallDave TallDave
    20. July 2022 at 08:08

    sorry Scott, that was a bit too cryptic… just meant (as I think you’d agree) that monetary policy is way too loose right now unless we’re already in a much deeper recession than anyone thinks we are

    do think it’s important to distinguish between whether the previous recession was caused by overly tight Fed policy (clearly there was a supply shock) as opposed to dramatically worsened (as you’ve pointed out they were still worrying about inflation the Fed minutes as the crisis unfolded)

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