Hard money is giving us socialism

Over the past few years, I’ve occasionally done some posts with titles like “Inflation of socialism?” It’s now clear that society has decided on socialism. So how did we get here?

I’ve recently listened to some excellent discussions in a Cato seminar on reforming the Fed. Many of the participants have suggested that the recent increase in activist credit and fiscal policies is an inevitable and/or desirable outcome, given the severity of the recession. Obviously I don’t agree, but just as obviously I’m in the minority.

By far the most important cause of the rise in credit/fiscal policies is the fact that interest rates have fallen to zero. This impacts policy in two unfortunate ways:

1. When rates fall to zero, most people (wrongly) assume that monetary policy is out of ammunition. As a result they advocate fiscal stimulus.

2. At zero interest rates there is a large increase in the demand for base money. As central bank balance sheets increase sharply, they begin accumulating a wide range of assets—shifting from pure monetary policy toward credit allocation.

The supreme irony here is that the tight money policies that put us into this situation are advocated by a variety of right-of-center types (traditional monetarists, Austrians, New Classicals, etc.) that almost universally abhor socialism. That’s right, it’s the Bob Murphys of the world that are unwittingly pushing us toward socialism.

And you can’t say I didn’t warm you. Ever since I began blogging in early 2009, I repeatedly warned that neoliberalism could only thrive under stable NGDP growth, and that falling NGDP growth always led to statist polices. People wrongly blamed the “free market” for problems that were actually caused by excessively tight money. (Because money didn’t “look tight”.)

That doesn’t necessarily mean we need a higher inflation target. It would be worthwhile to first try two other options:

1. Eliminate IOR

2. Switch to level targeting

Maybe these two options would be enough to get us out of the zero bound trap. But if they are not, then 3% inflation is far, far, far, far, far, far, far, far, far better than socialism.

Off topic: I recommend this excellent Noah Smith article on Covid-19. He puts the lockdowns in their proper perspective:

Together, this toolkit — masks, testing and tracing and targeted lockdown-lite — can control the virus until a treatment or vaccine arrives, while causing minimal damage to the economy.

I’d replace lockdown lite with “voluntary social distancing”, but otherwise almost entirely agree.

Unfortunately, the US has decided to go in a different direction.

PS. The recent data suggest that, at a global level, the Covid-19 pandemic has taken a turn for the worse. Hopefully it’s just a blip.



71 Responses to “Hard money is giving us socialism”

  1. Gravatar of Postkey Postkey
    19. June 2020 at 11:53

    “People wrongly blamed the “free market” for problems that were actually caused by excessively tight money. (Because money didn’t “look tight”.)”

    Did ‘excessively tight money’ bring about this ‘problem’ rather than the ‘excessively’ ‘free market’?

    “As Axel Weber remarked, afterwards:
    I asked the typical macro question: who are the twenty biggest suppliers of securitization products, and who are the twenty biggest buyers. I got a paper, and they were both the same set of institutions…. The industry was not aware at the time that while its treasury department was reporting that it bought all these products its credit department was reporting that it had sold off all the risk because they had securitized them…” 1h. 10m. in.

    “The root problem of 2008 was a failure to recognize that the highly leveraged money center banks had used derivatives not to distribute subprime mortgage risk to the broad risk bearing capacity of the market as a whole but, rather, to concentrate it in themselves.”

  2. Gravatar of Nic Johnson Nic Johnson
    19. June 2020 at 11:57

    Dear Scott,

    Long-time listener, first-time caller. Love the show, but I haven’t tuned in in a while. Have you done a recent post interpreting the Japanese situation at all? It looks like they’ve tried a higher inflation target, backed by tons of money printing and promises to keep it permanent, but the BOJ hasn’t been able to hit its target for the past few years. What gives? Can you really chalk it all up to “they didn’t try hard enough yet” at this point?


  3. Gravatar of jj jj
    19. June 2020 at 12:04

    Compare the global trend of daily new cases (up) to daily deaths (down). The same trend is visible in almost every individual country. The pandemic hasn’t taken a turn for the worse, we’re just testing more.

    Good graphs available here: http://www.worldometers.info/coronavirus/

  4. Gravatar of South African Fan South African Fan
    19. June 2020 at 12:08

    As you said in your previous post: “As I keep telling you all, the second term is going to be completely INSANE.”‘

    If the socialists are patient for 4.5 more years they can take it all. A second term will turn even the Bible belt permanently blue.

  5. Gravatar of ssumner ssumner
    19. June 2020 at 12:08

    jj, You are out of date. Deaths were falling, but no longer. And cases are rising (globally and in the southern US) even accounting for increased testing.

  6. Gravatar of Can Sar Can Sar
    19. June 2020 at 12:10

    This is a slight tangent but I’ve been wondering on whether attempts to stimulate the economy are a net benefit to the poor (this had been my prior assumption and I think the case for the average citizen is is much simpler and clearer):

    I’ve been recently debating a hard money advocate who is saying that inflation hits the poor hardest since they mainly rely on wages and therefore “using” inflation to simulate the economy leads to greater inequality (IMO plausible) and also static or falling earnings for the poor (IMO on shakier ground). My gut feeling is that reasonable levels of inflation lead to a tighter job market which eventually leads to higher inflation adjusted wages than under hard money. Unfortunately it seems that determining whether this is actually the case is a difficult empirical problem.

    We could of course redirect some of the additional economic output towards helping the poor (though that can be tough politically) but I’m curious whether the wage argument is legitimate outside of these factors.

  7. Gravatar of ssumner ssumner
    19. June 2020 at 12:15

    Nic, They haven’t promised to keep it permanent (AFAIK), nor should they. That could lead to hyperinflation. They need to do two things:

    1. Switch to a level target.
    2. Buy as many assets as needed to hit their target (or at least raise inflation expectations to their target.)

    They have done neither.

    If the BOJ doesn’t know how to create inflation, I’d be glad to show them.

    Can Sar, They are reasoning from a price change when they say inflation hurts the poor. Supply side inflation does hurt the poor, but demand side inflation raises incomes faster than prices and thus helps the poor, at least when the economy is depressed.

  8. Gravatar of El roam El roam
    19. June 2020 at 12:51

    Interesting, but, unstable NGDP should not be necessarily associated with the so called socialism. Reasons for growing demand for socialism, has to do mainly, with other reasons. Just one right now:

    Free markets, create more and more regulation and legislation. More competitors ( anti trust laws for example) more economic abuses, more and more technology, more international trade and so forth…. finally, one society, becomes more and more addicted to regulation and legislation. As such, the so called left or leftists, fight back abuses, by more and more regulation, for helping victims, and reducing the alleged abuse of more or higher socioeconomic classes. That was the result of the Subprime crisis (as illustration):

    Huge wave of new regulation ( as example, while the crisis had to do rather with lack of regulation over any stable NGDP of course).


  9. Gravatar of Can Sar Can Sar
    19. June 2020 at 13:05

    Touché! After all of this I’m still reasoning from a price change. At least I’m in plentiful and often good company. I appreciate the response.

  10. Gravatar of El roam El roam
    19. June 2020 at 13:12

    Just punchline to my comment above:

    Free markets, increase regulation and legislation. As such, it becomes addictive tool for leverage to fight higher classes, and help vulnerable population(by using that angel of intensive legislation).

    So, paradoxically, more free markets so called, more potential for socialism in fact.

    There are many other reasons, but, we won’t stay young here no more.


  11. Gravatar of Matthew W Matthew W
    19. June 2020 at 13:21

    If govt intervention in credit allocation is an issue with QE, why dont you advocate for a negative fed funds rate to achieve the level target?

  12. Gravatar of bb bb
    19. June 2020 at 14:00

    It is very clear that popularity of socialism, which is centered among millenials, is a direct response to the great recession and the great recession was caused by hard money. So yes.
    Looking forward, the Fed seems ready to make the same mistake, but I could also see them getting more aggressive once the real shock has passed. I think the presence of the real shock provides cover for inaction.
    The stimulus measures (I prefer to call them disaster relief) will start expiring next month. That will introduce many American to insecurity for the first time. I expect a whole new generation of socialists as a result. I won’t be surprised if a socialist wing emerges in the republican party. It’s unfortunate, but nobody should be surprised when it happens.
    The Cov-19 situation is so depressing. We’ll lose 100k people this summer due to inaction. According to this article in the Post, Germany’s very successful response was mostly informed by research performed in the US. Unbelievable.

  13. Gravatar of Thrawn997 Thrawn997
    19. June 2020 at 14:08

    Can someone explain why we’d go to a 3% inflation target if we were going to change it? Why wouldn’t a larger number like 25% be workable? Isn’t the important part that we stick to it over long time horizons? Is the specific value that important? And if so how do we determine what it should be?

  14. Gravatar of Jamie Jamie
    19. June 2020 at 14:14

    Almost all of America’s problems are caused by terrible public policy. But to some extent, its not surprising considering the failed state of our education system. In the 1920’s the poor understood that capitalism produced winners and losers, and if you didn’t produce or innovate, then you could not get rich. In the 2020’s, people want ‘safe spaces’, ‘quotas’, so on and so forth. Its a bad time to be American, I would surmise that the future is bleak. Most of the Americans born today will have a much worse life than previous generations. There are many things to learn from the American experiment though: namely, its probably not ideal to have people voting who are terribly uneducated. Look at the state of American cities. They look third world now, and they are controlled by which party? Exactly! If Americans would vote with their brains, instead of their hearts, they would be a lot better off.

  15. Gravatar of Cartesian Theatics Cartesian Theatics
    19. June 2020 at 14:19

    Let’s hope we can go the route of New Zealand/Sweeden and figure out how to sell capitalism as socialism.

  16. Gravatar of ssumner ssumner
    19. June 2020 at 15:54

    Matthew, I have said that would be better than doing nothing. It’s not my first choice, but I’d favor it if other options were not pursued. Indeed my very first blog post mentioned negative IOR.

    bb, I agree about Cov-19

    Thrawn, I assumed 3% would be politically feasible. A 25% rate damages capital formation.

    Cartesian, Very good point.

  17. Gravatar of agrippa postumus agrippa postumus
    19. June 2020 at 16:32

    end ior. yes. end credit allocation by the fed. yes. end fical policy by the fed. yes. add: free banking, dismantle the fed or at least the washington based board, anchor the dollar to gold or sdrs starting at 2000/oz, but at increasing increments to achieve a 5% inflation until the federal debt gets to sustainable level, break up the big banks, restore glass stegal, close the discount window to the dealers for speculation, allow a flexible currency loaned freely by the treasury at a penalty rate on good collateral.

  18. Gravatar of Benjamin Cole Benjamin Cole
    19. June 2020 at 16:38

    I think I agree with this post.

    I prefer generally free markets.

    It may be that a first world nation needs to try to maintain tight labor markets to persuade the voting public that free markets actually work.

    The US has followed a de facto loose labor market policy for much of the last 40 years. The Federal Reserve considered any unemployment rate below 5% to be dangerous. There were de facto open borders with a third world nation. The offshoring of labor-intensive Industries was encouraged. In addition, payroll taxes were raised.

    The only market that was kept tight was property, through intensive property zoning, hardly ever the topic of conversation among macroeconomists. Monthly economic rent is extracted from a largely employee class with hardly a murmur from leading macroeconomists.

    The average employee in Japan and Germany is working far less hours than 40 years ago and yet their living standards have risen. The opposite is true for large swaths of Americans.

    You want to save free markets? Scott Sumner is correct about monetary policy but there are some other policies that need adjustment as well.

  19. Gravatar of Michael Sandifer Michael Sandifer
    19. June 2020 at 20:47

    I wasn’t expecting, but was hoping the Fed would use this crisis as an opportunity to at least introduce average inflation targeting when near the ZLB, as Bernanke recommended last year. We’re not even getting this mild improvement.

  20. Gravatar of anon anon
    19. June 2020 at 21:26

    Noah Smith may be obscuring the actual fact w.r.t to Sweden. The money quote from that NPR link that Noah Smith gives is

    [quote]In a recent interview he appeared to admit Sweden should’ve adopted stricter measures but later said his comments had been overinterpreted. He said he still believes in the country’s strategy but regrets the high death toll.[/quote]

    scott, “lockdown lite” with “voluntary social distancing”. Obviously if every followed “voluntary not-driving while intoxicated” or “voluntary reporting of income and pay taxes”, lots of accidents could be prevented, IRS could be cut in size and lot of lawyers would have to search for better work. But vndwi doesn’t seem to work. So w.r.t to VSD, what is a government expected to do – prosecute after some schmuck super-spreader spread it to 100 folks? accidents atleast are local and limited in geography – an accident in front of 1600 isn’t going to cause an accident in Denver; whereas a schmuck infecting some other schmuck in front of 1600 could as well cause in Denver too.

    totally tangential, on china

    some recent headlines

    So if you and one of your neighbor have some issue, the fault could be anywhere. But if you have a quarrel with everyone of your neighbor (or partners), time to re-evaluate?

  21. Gravatar of Ray Lopez Ray Lopez
    19. June 2020 at 22:57

    Wow. Look at Nic Johnson’s post and Sumner’s reply. Speaks volumes.

    Sumner, who amusingly thinks the US is socialist, apparently from hanging out at Cato (he should hangout in Europe instead) has never discussed or is not aware of the Bank of England historical survey paper from Jan 2020 that showed real interest rates have fallen for the last several centuries, despite even fiat money not backed by any hard assets. Yet Summer advocates the socialism of money (central banking) Wow.

  22. Gravatar of Postkey Postkey
    19. June 2020 at 23:12

    ” . . . but demand side inflation raises incomes faster than prices and thus helps the poor, at least when the economy is depressed.”

    In the short run, the profit maximising level of employment is where the mpl = W/P?
    Assuming diminishing marginal productivity of labour {mpl}, then, for more employment, the price level has to increase faster than the nominal wage?

  23. Gravatar of Rajat Rajat
    20. June 2020 at 00:35

    Michael, I agree. It seems that the great stagnation has worked its way into everything – even down to the level of prestigious institutions responding to failure by trying new ideas with impeccable theoretical pedigrees. It’s not helped by the fact that the mainstream/ New Keynesian economics profession has shifted more towards socialism itself – more government intervention and fiscal stimulus. Scepticism about the effectiveness of monetary policy seems to be due to a mood affiliation-type problem.

  24. Gravatar of Matt Moore Matt Moore
    20. June 2020 at 00:44

    Somewhat related (socialism vs growth), do you have any thoughts on the UK declaring they will seek to join CPTPP?


  25. Gravatar of Michael Sandifer Michael Sandifer
    20. June 2020 at 05:13


    Yes, but I’m seeing cracks in the dam, at least on econ Twitter. Another Fed paper is being discussed, which estimates that the equilibrium interest rate has been lower than commonly estimated for years.


    I’ve been pointing to evidence of tight money, such as PCE inflation being below target, on average, for the entire recovery period since the Great Recession, with only a few blips above here and there. That’s the strongest bit of evidence, and of course, that means real GDP is even further below target, given that prices are sticky.

    I’ve also pointed to market signals, such as sharp drops in long-term interest rates following nominal shocks. Why should 10, 20,and 30 year bond rates fall so precipitously during downturns if the short-run AD/AS curve is really short-run? I argue that due to the Fed’s reaction function, there is no short-run near the ZLB.

    One can also look at monetary base velocity, and the inflation/RGDP ratio to get further clues that monetary policy has been too tight, even in recent years before the trade war and pandemic, and even when RGDP blipped at 3%.

    Moew fundamentally, I’ve been arguing for years now that low productivity in the US is primarily due to a lack of AD, due to low investment. I acknowledge that lower population growth has shaved about 1% off of RGDP potential, but also argue that potential has been higher than most acknowledge for decades. I think it was about 4.5% in the 90s and early 00s, and is near 3.5% today. Of course, some of that low population growth is also due to below potential RGDP.

    Econ Twitter is not with me on such high estimates of RGDP potential, but estimates of that potential seem to be moving up.

  26. Gravatar of Spencer Hall Spencer Hall
    20. June 2020 at 07:49

    1. Eliminate IOR

    Yes, that’s right. Remuneration of the IOeR is akin to Regulation Q Ceilings preferential interest rate differential in favor of the commercial banks (as opposed to the thrifts). The banksters have their cake and are eating it too.

    It is perverse in that lending by the DFIs is inflationary, whereas lending by the NBFIs is noninflationary. Lending by the DFIs reduces real interest rates. Lending by the NBFIs increases real interest rates. Interest is the price of credit. The price of money is the reciprocal of the price level.

    Remunerating IBDDs destroys money velocity, induces nonbank disintermediation (caused the Sept. 2019 repo crisis), it destroys the savings-investment process (where nonbank pooled savings are gov’t insured, and expeditiously activated into real investment outlets, aka, the U.S. Golden Era in Capitalism).

    2. demand side inflation raises incomes faster than prices and thus helps the poor

    That completely depends upon the trend rate of inflation. There is a “sweet spot”, where goosing the money stock increases AD, and therefore increases R-gDp faster than inflation. But that can’t be used to offset the contraction in R-gDp at the end of a business cycle. That would produce intolerable stagflation.

  27. Gravatar of Spencer Hall Spencer Hall
    20. June 2020 at 07:55

    re: “estimates that the equilibrium interest rate has been lower than commonly estimated for years”

    No such thing as R *. Investment hurdle rates are idiosyncratic. Business expenditures depend largely on profit-expectations, and favorable profit-expectations depend primarily on cost/price relationship of the recent past and of the present. Cost/price relationships are crucial, and they are particular; they cannot be adequately treated in terms of broad-aggregates or statistical weighted “averages”.

  28. Gravatar of Spencer Hall Spencer Hall
    20. June 2020 at 08:23

    re: “I’ve been arguing for years now that low productivity in the US is primarily due to a lack of AD, due to low investment.”

    Low AD or secular stagnation, exactly as predicted in the late 1950’s (along with stagflation), is due to the impoundment and ensconcing of monetary savings in the payment’s system.

    This is where every single economist is moronic, don’t know a debit from a credit, money from mud pie, financial intermediaries from commercial banks, etc.

    In the macro world, although large in aggregate, the inputs and outputs associated with any change in the payment system’s bank deposits are peripheral, are offsetting. Thus, it follows that loans create deposits. It follows that the banks pay for their earning assets with new money – not existing deposits.

    It also follows that an increase in savings deposits depletes transaction deposits, dollar for dollar.

    Leonardo Da Vinci said it best: “Before you make a general rule of this case, test it two or three times and observe whether the tests produce the same effects”.

    “The only relevant test of the validity of a hypothesis is comparison of prediction with experience.” – Milton Friedman

    As Dr. Leland James Pritchard (Ph.D., Economics, Chicago, 1933, M.S., Statistics, Syracuse) proposed in the late 1950’s:

    “Savings require prompt utilization if the circuit flow of funds is to be maintained and deflationary effects avoided”…”The growth of commercial bank-held time “savings” deposits shrinks aggregate demand and therefore produces adverse effects on gDp”…”The stoppage in the flow of funds, which is an inexorable part of time-deposit banking, would tend to have a longer-term debilitating effect on demands, particularly the demands for capital goods.” Circa 1960

    If you don’t understand stock from flow, you don’t understand money and central banking period.

  29. Gravatar of ssumner ssumner
    20. June 2020 at 09:16

    anon, Regarding lockdowns, did Taiwan close its restaurants?

    Just to be clear, I’m totally opposed to Sweden’s policy. But lack of lockdowns wasn’t their big mistake, their big mistake was not taking the problem as seriously as Taiwan.

    Regarding China, yes there’s a 50% chance that they are to blame, maybe 80%. But is it so far-fetched that the country that just invaded Kashmir a few months ago might also be rattling sabers?

    As you may know, both Taiwan and Kashmir are internationally recognized as part of China and India respectively, but have been governed independently since the late 1940s. India just invaded Kashmir; China has not invaded Taiwan.

    In any case, I was just teasing the earlier commenter, the whole post was a joke. Do you think he knew China was to blame because of evidence he had, or because he was naturally partial to India?

    Matt, Sounds like a good idea.

  30. Gravatar of Ray Lopez Ray Lopez
    20. June 2020 at 10:20

    Ssumner: ” India just invaded Kashmir; China has not invaded Taiwan.” – wow! Such ignorance! Kashmir is disputed by both Indian and Pakistan, so when India ‘invades’ Kashmir, Sumner is taking a stand that Pakistan is right in the dispute? How does Sumner know this? Does he have secret evidence the rest of us don’t? Sumner btw once tried to opine on Greek politics. I speak Greek, read Greek, live in Greece, but would not dare to opine on Greek politics, it’s too complicated for me. But not for our fearless leader! lol.

  31. Gravatar of James Alexander James Alexander
    20. June 2020 at 12:30

    Back in the 1970s Monetarists thought that high inflation leads to socialism. Actually, it led away from socialism as the 1980s proved.

    All paths lead seem to lead to socialism now that the economics profession is peopled almost entirely by experts in market failure with little or no interest in the economics of government failure or understanding of markets as a coordination process.

    Maybe things would have been different if governments didn’t control most universities directly (or indirectly by state-sponsored student loans) – but such is the way of the world.

    Of course, “socialism” is actually impossible as decentralised market coordination cannot be replaced by centralised coordination. Really serious attempts end up in Russian or Chinese mass starvations – and more or less prompt reversals improving things for a while. Sometimes a long while, like in China. In the end though you get worse and worse crony capitalism whether of the Venezuelan or Trumpian variety.

  32. Gravatar of Carl Carl
    20. June 2020 at 13:47

    Why do you believe the concept that tight money encourages socialism is so hard to grasp ( or perhaps why it’s just hard to accept )? It doesn’t seem that hard to me to grasp that if you make it too hard for people to pay their debts they will seek someone powerful to take care of them.

  33. Gravatar of Michael Sandifer Michael Sandifer
    20. June 2020 at 14:02

    James Alexander,

    I wouldn’t say that 70s high inflation helped lead much of the world away from socialism, but rather that it was the success of neoliberal monetarist policies in lowering inflation that did so. That, along with the supplyside stagnation that also needed easing.

  34. Gravatar of Michael Sandifer Michael Sandifer
    20. June 2020 at 14:23


    Have market reactions to the recent nominal shocks, including the trade wars and the pandemic made my amateur hypotheses about significant US output gaps from 2017-2019 more likely true?

    If not, how about looking at inflation, which averaged below target over the period? The average core PCE inflation rate was 1.73%, with standard deviation of almost 0.17%. Average RGDP growth was 2.54%, with standard deviation of 0.39%.

    A quick and dirty calculation, say multiplying the ratio of the standard deviation of RGDP growth over that of the inflation rate by the gap between the inflation target and average inflation rate would yield a very rough hypothetical figure of .62% for the output growth gap. This would obviously mean average growth in Y* was 3.16% over the period, to the degree this estimation approach is valid.

  35. Gravatar of Mark Z Mark Z
    20. June 2020 at 19:45

    Carl, it seems most people on the right, probably including libertarians in that, reflexively think of money supply management as central planning or interventionism (and on the left for that matter, but they’re less averse from the idea in general). The terminology of macroeconomics encourages this, since economists are constantly talking about a central authority trying to manage aggregate demand. The job of the government is not, in their (well, our) view to make it easy for people to pay their debts. I think the crux of the matter may be that many just haven’t thought about what a free market in money would look like, so they default to viewing expansionary monetary policy as interventionist, but it hasn’t occurred to them that in no other market would we view expanding the supply of a good as inherently interventionist. If the government asserted a monopoly in cars, and at some point afterward demand for cars went up but cost stayed the same, a free marketeer would encourage them to produce more cars, inasmuch as they intend to keep their monopoly. Acknowledging the importance of wage stickiness as a kind of market failure probably also bothers a lot of people.

    I think every inflation hawk should read George Selgin and Larry White’s article “How Would the Invisible Hand Handle Money” though to get a better understanding of what kind of policy would best recapitulate a free market in currency.

  36. Gravatar of anon anon
    20. June 2020 at 20:13

    scott, “the country that invaded Kashmir few months ago”.

    Jammu & Kashmir has been part of India since 1950’s are so when that kingdom acceded with India – made up of Jammu, Kashmir & Ladakh. Of that a part is called PoK because during some war after J&K acceded with India Pakistan waged a war and then occupied a portion on northwest of that state that India calls PoK which is de-facto Pak adminstered.

    India recently reorganized a single state into 3 UTs. Pakistan’s grievances of J&K acceding to India doesn’t mean “India invaded Kashmir” recently. India recently – as in about 18 months ago – conducted a surgical strike against terror camps in Balakot in Pakistan. There are frequent skirmishes in the LAC.

    You seem to have a blinkered view – on Muslim concentration camps & this topic – w.r.t to India but nary a proof or non-agenda driven news article pointers.

    An alternative view point would be: It is China that is invading not just Pakistan but lot of other BRI countries through economic warfare or creating dependencies that have long term unintended consequences. So did you mean China in “that country?”

  37. Gravatar of James Alexander James Alexander
    20. June 2020 at 21:37

    Michael Sandifer

    We agree. High inflation led to the Thatcher/Reagan regimes.

    That said, RGDP growth in the “high inflation” 1970s was higher than the 2010s the decade after (but not even including) the Great Recession. A second Great Depression (hat tip Marcus Nunes).

    26% vs 20% in the UK.

    37% vs 25% in the US

    Both were an equally woeful 20% in the 2000s

  38. Gravatar of Tacticus Tacticus
    21. June 2020 at 02:26

    Prof. Sumner,

    Do you have an opinion one way or another on if monetary policy would be better or worse if institutions like the Bank of England or the Federal Reserve were fully autonomous, privatised, and profit-seeking? I haven’t properly considered it to any degree, but it seems like it would probably see negative IOR pretty quickly, at a minimum.

  39. Gravatar of Bob Bob
    21. June 2020 at 04:01

    Regarding Noah Smith and the economic damage.

    The lack of economic imagination in the US is staggering and depressing. Restaurants are cramming tiny tables on the sidewalks, as though 4 tables are going to keep the restaurant afloat. But meanwhile every street and parking space remains open for all those commuters who aren’t driving through. Surface parking lots remain mostly empty. And for every mention about restaurants and bars struggling; the truth is that they’re mostly struggling to pay the rent, which is within landlords’ power. Who do landlords think will move in when these businesses go under? They’re going to have to freeze or renegotiate businesses’ rent, unless we’re fine with mass bankruptcies because the landlords aren’t willing to take a write down.

    If we had an ounce of reason, we would shut down cross streets and allow stores and restaurants to use all of that space. We would rope off large sections of unused parking lots, and rent tents from all those cancelled events, for outdoor flea markets and farmers markets.

    Do as much outdoors as possible. Test as much and as frequently as possible. Train contact tracers. For businesses that can’t operate outdoors: wear masks, ventilate the space as much as possible, and reduce capacity. We can reduce the economic damage without dramatically increasing the health risk, at least through the summer. The winter is going to be difficult, but we’ll know more about the disease by then and can hopefully mitigate the risk.

    We could manage this health and economic crisis. We just don’t seem very interested in managing it well.

  40. Gravatar of Michael Sandifer Michael Sandifer
    21. June 2020 at 08:36

    James Alexander,

    Thanks. Out of curiosity, do you think low AD has a lot to do with the low productivity growth since the early 2000s in the US?

  41. Gravatar of ssumner ssumner
    21. June 2020 at 09:53

    James, Government intervention seems to increase at either extreme—10% inflation or deflation.

    Michael, Output gaps are almost impossible to precisely estimate. The gap was probably near zero in 2018, but who knows?

    Anon, Taiwan and Kashmir are both officially part of their mother countries, but self governing. Or at least Kashmir was self governing until India recently invaded. This is not some weird theory on my part, the mainstream media was highly critical of India’s invasion.

    That may be all wrong, but you’ll need evidence to convince me otherwise. Modi is a nationalist thug, as is Xi Jinping

    Tacitus, What do you mean by profit maximizing? Seignorage maximizing? That occurs at hyperinflationary rates.

    Bob, Good point.

  42. Gravatar of Michael Sandifer Michael Sandifer
    21. June 2020 at 10:27


    I think you’re expressing the consensus in the profession with your comments about estimating output gaps.

    However, there was also broad consensus that potential RGDP growth was roughly 2% or less, and yet it averaged over 2.5% for three years, with below target inflation.

    I recall stating a few years ago that I thought potential RGDP was around 3.5%. I think that estimate looks much better today than it did then.

    Consider that was before the trade wars. If we drop the stupid new trade barriers, that should boost average RGDP growth a bit. Also, higher RGDP growth could easily lead to a bit more population growth, making a 3.5% potential RGDP growth rate sound much more reasonable than 3 years ago.

    Also, this would provide a bit of support for the notion that r should equal NGDP growth expectations, in equilibrium.

  43. Gravatar of James Alexander James Alexander
    21. June 2020 at 10:39

    Michael S

    Low productivity is caused by lots of things but low AD is one of them.

    I think low AD acts by reducing the flexibility of an economy to let some unproductive folks gradually fall behind in real terms, because nominal wages are downwardly sticky. Healthy AD growth allows for more variation in real outcomes, allowing higher productive folks to get relatively higher rewards and attract more folks into those more productive activities.

  44. Gravatar of Michael Sandifer Michael Sandifer
    21. June 2020 at 16:28

    James Alexander,

    Thanks for the insight. That seems very plausible. Looking at the data, productivity, including TFP, does seem to have a cyclical component.

  45. Gravatar of Thomas Hutcheson Thomas Hutcheson
    21. June 2020 at 18:59

    Why can’t the Fed just purchase 1) all the federal debt in private hands and if that is not enough, debt of foreign sovereigns?

  46. Gravatar of dtoh dtoh
    21. June 2020 at 20:46

    @Michael Sandifer

    You said, “If not, how about looking at inflation, which averaged below target over the period? The average core PCE inflation rate was 1.73%, with standard deviation of almost 0.17%. Average RGDP growth was 2.54%, with standard deviation of 0.39%.”

    Scott thinks it more of a step function….once you’re at “full” output any further growth is all nominal (i.e. inflation.) IMHO, it’s more of a slope that steepens as NGDP goes up so you can keep eeking out some more real growth until inflation gets into double digits.

    I also think you’re underestimating the current potential growth (3.5%) because investment returns in the last 20 years or so have become much more asymmetric and therefore for a given nominal tax rate, the effective tax rate has gone up. These asymmetric returns are much more prevalent for new ventures, which have been a major engine of growth.

  47. Gravatar of dtoh dtoh
    21. June 2020 at 20:54


    You said, “Eliminate IOR.” I would be a little more general and say “Reduce ER” or just “Reduce Reserves.”

    If newly created money does not get out of the banking system, it has ZERO effect. If the Fed does OMP by simply exchanging reserve deposits for Treasuries with JP Morgan, it has no more impact on the economy than if the Fed were simply to move cash from the Fed vault in Chicago the Fed vault in St. Louis.

  48. Gravatar of Postkey Postkey
    21. June 2020 at 23:49

    “If newly created money does not get out of the banking system, it has ZERO effect.”
    This appears to be the case.

    However, this is the analysis of a ‘Thatcherite’ monetarist.

    ‘The objection is sometimes raised that the major holders of gilts are pension funds and insurance companies, and they will not “spend” the extra money in the shops. But the big long-term savings institutions are reluctant to hold large amounts of money in their portfolios, because in the long run it is an asset with negligible returns. At the end of 2008 UK savings institutions had total bank deposits of about £130 billion. They will be reluctant to let the number double, but — if the £150 billion were allowed to pile up uselessly — that would be the result.
    What is the likely sequence of events? First, pension funds, insurance companies, hedge funds and so on try to get rid of their excess money by purchasing more securities. Let us, for the sake of argument, say that they want to acquire more equities. To a large extent they are buying from other pension funds, insurance companies and so on, and the efforts of all market participants taken together to disembarrass themselves of the excess money seem self-cancelling and unavailing. To the extent that buyers and sellers are in a closed circuit, they cannot get rid of it by transactions between themselves. However, there is a way out. They all have an excess supply of money and an excess demand for equities, which will put upward pressure on equity prices. If equity prices rise sharply, the ratio of their money holdings to total assets will drop back to the desired level. Indeed, on the face of it a doubling of the stock market would mean (more or less) that the £150 billion of extra cash could be added to portfolios and yet leave UK financial institutions’ money-to-total-assets ratio unchanged. 
    Secondly, once the stock market starts to rise because of the process just described, companies find it easier to raise money by issuing new shares and bonds. At first, only strong companies have the credibility to embark on large-scale fund raising, but they can use their extra money to pay bills to weaker companies threatened with bankruptcy (and also perhaps to purchase land and subsidiaries from them). 
    In short, although the cash injected into the economy by the Bank of England’s quantitative easing may in the first instance be held by pension funds, insurance companies and other financial institutions, it soon passes to profitable companies with strong balance sheets and then to marginal businesses with weak balance sheets, and so on. The cash strains throughout the economy are eliminated, asset prices recover, and demand, output and employment all revive. So the monetary (or monetarist) view of banking policy is in sharp contrast to the credit (or creditist) view. Contrary to much newspaper coverage, the monetary view contains a clear account of how money affects spending and jobs. The revival in spending, as agents try to rid themselves of excess money, would occur even if bank lending were static or falling. 
    The important variable for policy-makers is not the level of bank lending to the private sector, but the level of bank deposits. (Remember Irving Fisher’s reference to “deposit currency”.) Indeed, because companies are the principal employers and the representative type of productive unit in a modern economy, bank deposits in company hands need to be monitored very closely. If these deposits start to rise strongly as a by-product of the Bank of England’s adoption of quantitative easing, the recession will be over. 
    Is quantitative easing working? Lags between economic policy and its effects are unpredictable, and celebration would be premature. Nevertheless, the first two months of quantitative easing have seen startling improvements in several areas. Most obviously, the UK stock market has soared by 30 per cent and corporate fund-raising has been on a massive scale. Anecdotally companies are saying that cash pressures are less severe. Business surveys have also turned upwards, with a key survey of the services sector suggesting earlier this month that almost as many companies planned to raise output as to reduce it. If there are more output-raising than output-reducing companies, the recession will be over.. . .

    Another enigma here is that the alternative view — that in the long run, national income is a function of the quantity of money — has clear and overwhelming substantiating evidence from all economies at all times. Both evidence and standard theory argue that the expansionary open market operations that are the hallmark of quantitative easing, not bank recapitalisation, should have been policy-makers’ first priority last autumn. In the next crisis they must accept that money, not bank credit by itself, is the variable, which matters most to macroeconomic outcomes.’
    June 2009

    Why he still emphasises M3 as the main determinant of NGDP when his “analysis” “explains” the powerful effect of increases in M0, is quite confusing?

  49. Gravatar of Postkey Postkey
    22. June 2020 at 00:05

    Here: https://surplusenergyeconomics.wordpress.com/2020/06/19/175-the-surplus-energy-economy/#comments is someone who argues that 3.5% potential ‘growth’ is a ‘pipe dream’?

    ‘As a result, prior growth in prosperity per person has gone into reverse. People have been getting poorer in most Western advanced economies (AEs) since the early 2000s. With the same fate now starting to overtake emerging market (EM) countries too, global prosperity has turned down. One way of describing this process is “de-growth”.’

  50. Gravatar of Tacticus Tacticus
    22. June 2020 at 00:18

    Not profit-maximising, but profit-seeking. So, instead of the Fed sending the Treasury, for example, $54.9 billion of the $55.5 billion it made in 2019, a significant portion of this could be instead sent to shareholders, subject to how close NGDP growth was(/is forecast to be) to the target mandated by Congress. Profit-maximisation would occur if NGDP growth was(/was forecast to be) exactly, for example, 4%.

    I suppose this musing comes from my dislike of socialism, love of financial history, and confusion over current US monetary policy. You know, I know, TIPS traders know, and Powell knows that money is too tight right now, yet IOR continues, etc. I wonder if a private institution might be better aligned to achieve desirable NGDP growth.

  51. Gravatar of Christian List Christian List
    22. June 2020 at 02:09

    So Trump is right once again, that money is too tight and that this is the root for many problems? Okay, Scott would never admit that.

    Aren’t the 1960s and 1970s considered the most “socialist” decades of America, including pretty “loose” monetary policy? Did this lead to more socialism in the 1980s?

    And then Volcker and Reagan came and changed to a policy that is considered “tight” by many, at least tighter than in the decades before.

    I’m not saying money was tight in the 1980s but people seem to think it was, and this might be one explanation why many conservatives are so fixated on “tight” money today, at least on paper.

    Trump had no strong competitors, but it is hard to imagine politicians like Ted Cruz or Kasich or Romney, or even Hillary, running around complaining that the money is too tight at these interest rates. Trump is probably the only current politician who instinctively recognizes this, even though he has no deeper understanding of the mechanisms at play.

  52. Gravatar of Michael Sandifer Michael Sandifer
    22. June 2020 at 05:07


    I just take the short-run AS/AD model as is, except that it doesn’t seem to be short-run anymore. When 30 year rates plunge precipitously in response to nominal shocks, to the degree we take them seriously, we have to doubt the short-run claim, at least.

    Perhaps Scott sees the economy as having adjusted to inflation undershooting, so that the real effective target rate is below 2%. Since he still thinks SRAS/AD applies, I assume he thinks there’s been plenty of time to adapt to the lower inflation rates.

    We agree that some of the tax cuts Trump signed into law boosted real GDP temporarily, and boosted real growth a bit going forward, but the boost was offset somewhat by his stupid trade war. My rough 3.5% estimate of RGDP potential came from the idea that nominal rates should equal NGDP growth expectations, in monetary equilibrium. I don’t think it’s much higher than that, given the offsetting trade restrictions.

    I can’t stand Trump,but he has been undermined by tight money, even though his idea of how monetary policy works is simplistic and hopelessly flawed.

  53. Gravatar of Michael Sandifer Michael Sandifer
    22. June 2020 at 05:17

    Christian List,

    Trump has been right for the wrong reasons. He’s a mercantilist who not only sees low rates as being absolutely stimulative in a vacuum, apparently without regard to the yield curve, but also thinks that monetary policy is competitive in determining trade balances.

    It’s good that he takes stock market reactions seriously, but he treats it like a simple score card.

  54. Gravatar of marcus nunes marcus nunes
    22. June 2020 at 06:11

    @james alexander @mike sandifer
    I hope the Fed eschews the tight money bias that prevailed over the past 12 years.

  55. Gravatar of ssumner ssumner
    22. June 2020 at 09:25

    Tacitus, I think the best way to harness the profit motive is with my NGDP targeting proposal.

    Christian, You said:

    “So Trump is right once again, that money is too tight and that this is the root for many problems?”

    LOL, are you now going to lower yourself down to Ben’s level? Trump thinks interest rates are monetary policy, hence he thinks policy is getting easier. Negative rates (as in Japan) are Trump’s ultimate goal. No thanks!

  56. Gravatar of Michael Sandifer Michael Sandifer
    22. June 2020 at 10:03

    Marcus Nunes,

    Nice piece, as usual. Yes, it does seem the Fed, and many economists, have driven down estimates of real growth potential, even before wages adjusted. We see this after every recession. Unfortunately, the long, weak recovery from the Great Recession fooled more people than usual.

    In fairness, I do think real growth potential fell about 1% since the early 2000s.

  57. Gravatar of Christian List Christian List
    22. June 2020 at 13:40


    we’ve had this discussion before. Every politician thinks that interest rates reflect the state of monetary policy – given that these people think anything about this issue at all.

    Even most economists and central bankers pretend that interest rates reflect the state of monetary policy. Trump is really not an outlier here. It’s also true that he doesn’t know much about the subject and that he is totally biased, but it’s all the funnier that he was “right” so many times.

    From a medical point of view I find him fascinating anyway, this person can basically not read and maybe not even write. He seems to absorb even spoken words only to a very limited extent. He needs visuals like a TV in order to understand an issue in parts. How does such a person find his place in the world? I imagine such diseases are more widespread than one might think. Does he only rely on his instincts? Such a person must develop some kind of (extreme) compensation mechanisms.

    Maybe Hitler was the same in this regard, this seems entirely possible.

    I know, but I would rather be right for the wrong reasons than wrong for the right reasons. I am not an ideologue, the actual direction must be right and not necessarily the ideology.

  58. Gravatar of ssumner ssumner
    22. June 2020 at 17:43

    Christian, But he wasn’t “right”, because interest rates are not monetary policy. Trump favors expansionary policy when the GOP is in office and contractionary policy when the Dems are in office. To call that “right” is just stupid.

    And Hitler did read books, unlike Trump.

  59. Gravatar of Michael Sandifer Michael Sandifer
    22. June 2020 at 19:22

    Christian List,

    The problem with that is that Trump is not advocating policies that would actually help. He’s just demanding lower rates, without regard to the term structure, and with regard to being competitive with the EU. If taken literally, we could end up with even more stagnation like the EU or Japan, but perhaps with even lower nominal rates.

    That said, it’s not clear he would stay any particular course, since the stock market would suffer under his very unuanced preferred policies. It’s hard to know where policy would ultimately end up if he had direct control. My guess is, it would be erratic for a long period of time.

  60. Gravatar of Postkey Postkey
    23. June 2020 at 00:25

    “. . . One is reducing the interest rate on bank reserves, even if necessary making a negative.”

    ” . . . And in terms of reducing the demand for base money, you can do that in a number of ways. But he wasn’t “right”, because interest rates are not monetary policy.”

    Interest rates affect the ‘demand for money’, but are not classified as ‘monetary policy’?

  61. Gravatar of Spencer Hall Spencer Hall
    23. June 2020 at 05:00

    You have to wonder how these guys get their bias and ignorance. They obviously can’t trade the financial markets.

    Targeting N-gDp has interest rate effects. I call it FOMC schizophrenia: Do I stop because inflation is increasing? Or do I go because R-gDp is falling?

    It will drive savers into commercial bank time deposits. I don’t agree with everything that Dr. Philip George says, but his predicted reaction to policy is right.

    If you can’t explain the drop in money velocity since 1981, then you are stupid. Banks can’t loan out existing deposits. They pay for their earning assets, from the standpoint of the system (not an individual bank) with new money.

    Even a janitor has something important to say. But you get guys like George Selgin, who testified before Congress saying:

    This is nonsense, Spencer. It amounts to saying that there is no such things as ‘financial intermediation,’ for what you claim never happens is precisely what that expression refers to.”

    How myopic. All Ph.Ds. are vacuous. They don’t know 2 credits from 2 debits.

    The last 60 years were explained in the conference:
    “Should Commercial Banks Accept Savings Deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43.

    “Profit or Loss From Time Deposit Banking”, Banking and Monetary Studies, Comptroller of the Currency, United States Treasury Department, Irwin, 1963, pp. 369-386,

    If you want to remain an idiot for the rest of your life, ignore this.

  62. Gravatar of Spencer Hall Spencer Hall
    23. June 2020 at 05:09

    Socialism is about income inequality. Just like in the Great Depression, payrolls must be sufficient to buy the goods and services produced – at the asked prices. Henry Ford’s competitive efforts helped bring this country out of the Great Depression. It was the first time a worker on the assembly line could buy what he was fabricated.

    So too was the Golden Era in U.S. Capitalism, where savings were expeditiously activated into real investment outlets (largely residential real estate).

    During the U.S. Golden Era in Capitalism (not optimized), the annual compounded rate of increase in our means-of-payment money supply was about 2 percent. The nonbanks grew faster than the commercial banks (through an increase in Vt), and thereby a higher percentage of savings was utilized (through direct and indirect investment) and was also FSLIC and NCUA insured.

    And during this same period, 1955-1964, the rate of inflation, based on the Consumer Price Index, increased at an annual rate of 1.4 percent. Unemployment averaged 5.4 percent.

    Things ended in 1965. That’s when the commercial banks began to outbid the non-banks for loan-funds (resulting in disintermediation of the thrifts).

  63. Gravatar of Michael Sandifer Michael Sandifer
    23. June 2020 at 05:11

    Post Key,

    Interest rates do not affect the demand for money. Interest rates are the prices of credit, not money. You’re confusing cause and effect.

    Interest rates do reflect the supply and demand for money, however. Everything in macroeconomics starts and ends with AS versus AD, and understanding how money fits in.

  64. Gravatar of Spencer Hall Spencer Hall
    23. June 2020 at 05:14

    If you can’t predict GDP, then you can’t understand and explain economics.

    “Buy as many assets as needed to hit their target (or at least raise inflation expectations to their target.)” is right up to a point.

    It is very clearly demonstrated by monetary flows, volume times transactions’ velocity. The distributed lag effects of money flows are not “long and variable’. They have been mathematical constants for over 100 years. Thus we know precisely when to remove the punch bowel.

  65. Gravatar of Matt Moore Matt Moore
    23. June 2020 at 06:21

    Scott – FYI a major and very influential UK think tank, plus the last Chancellor of the Exchequer, just released a report calling for NGDP growth targeting after the pandemic


  66. Gravatar of Postkey Postkey
    23. June 2020 at 07:15

    “And in terms of reducing the demand for base money, you can do that in a number of ways. One is reducing the interest rate on bank reserves, even if necessary making a negative.”

  67. Gravatar of Carl Carl
    23. June 2020 at 08:37

    Where does one go to find historical charts of NGDP/the price level beyond the last 100 years? It’s clear that statism increased during the periods of NGDP contraction in the last 100 years. I’d like to see the relationship going further back in history.

  68. Gravatar of ssumner ssumner
    24. June 2020 at 10:16

    Thanks Matt.

  69. Gravatar of Spencer Hall Spencer Hall
    25. June 2020 at 04:28

    re: “One is reducing the interest rate on bank reserves”

    That’s precisely the problem. Banks don’t loan out savings. Drive the banks out of the savings business! The remuneration rate on excess reserves acts like the old Reg. Q ceilings did, but in reverse (by destroying money velocity and increasing nonbank disintermediation).

  70. Gravatar of Postkey Postkey
    25. June 2020 at 05:38

    “And in terms of reducing the demand for base money, you can do that in a number of ways. One is reducing the interest rate on bank reserves, even if necessary making a negative.”

  71. Gravatar of Potpourri Potpourri
    30. June 2020 at 08:40

    […] Scott Sumner nails it: It’s my fault the Fed has been engaged in tight money, and the coming socialism is also my […]

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