The WSJ wants to raise interest rates; now they just need to find a reason

I don’t comment on the Wall Street Journal very often, as they are behind a paywall. But I did read an editorial in a paper copy a few days ago, and as I recall the piece went on and on about how the Fed needed to be raising interest rates, without once discussing the Fed’s actual 2% inflation target.  But they did have lots to say about unemployment.

Things sure have changed.  When I used to subscribe to the paper version of the WSJ, they constantly lectured us on the fallacy of “Phillips Curve” thinking.  They told us that the Fed should control inflation, and not worry about unemployment. They obsessed about the value of the dollar.

And now inflation is running well below 2%, and is expected to continue doing so for many years, and King Dollar is back in the foreign exchange market.  But gosh darn it there must be some reason the Fed needs to raises interest rates, because . . . well, just because.

I’m amused when people suggest that market monetarism is losing out among conservatives.  The only conservatives who seem to even have a coherent set of views on monetary policy are what Ross Douthat calls the “reform conservatives.” He mentions people like Ramesh Ponnuru, Jim Pethokoukis, Reihan Salam and Yuval Levin. Douthat suggests that reform conservatives favor:

e. A “market monetarist” monetary policy as an alternative both to further fiscal stimulus and to the tight money/fiscal austerity combination advanced by many Republicans today.

As far as the rest of the conservative movement – – – what are you waiting for? Moping around that interest rates are too low, just because, does not constitute a coherent monetary policy regime that will survive in the rough and tumble intellectual debate over public policy.  (I.e., it won’t survive Paul Krugman attacks, and for good reason.)

On March 30th, I’ll be speaking in favor of NGDP targeting at the Dirksen Senate Office Building.  I don’t feel at all lonely.

PS.  It’s worth noting that many of the best people in what might be called the free banking movement (Larry White, George Selgin, etc.) are also sympathetic to a monetary policy involving a nominal income target, or something closely related. And I’ve found lots of support for MM at free market think tanks in places like Britain and Australia.

PPS.  I have a new post on Stanley Fischer over at Econlog.




92 Responses to “The WSJ wants to raise interest rates; now they just need to find a reason”

  1. Gravatar of Kenneth Duda Kenneth Duda
    24. March 2015 at 07:31

    Scott, has Krugman ever written anything of substance about MM? He annoys me once again with this blog post:

    in which he writes:

    > On the other side, there are “reformicons” who try to more or less talk
    > sense about the economy (more or less because market monetarism has big
    > problems)…

    but as usual, he neglects to comment on what those “big problems” are. Fundamentally, I don’t get why smart Keynesians would oppose market monetarism. It’s just better monetary policy. If it works the way we expect, there will be no more significant output gaps. If it doesn’t, well, the Keynesians are no worse off — they can continue to argue for fiscal expansion to plug any output gaps that do arise. They have nothing to lose, and everything to gain, assuming they actually care about full employment. Do Keynesians really prefer inflation targeting plus QE muddle over NGDPLT? Why ??


    Kenneth Duda
    Menlo Park, CA

  2. Gravatar of flow5 flow5
    24. March 2015 at 07:32

    As long as it is profitable for borrowers to borrow and commercial banks to lend, money creation is not self regulatory. This observation would be valid even though the Fed did not use interest rates as a guide to open market operations.

    By using interest rates as the monetary transmission mechanism, the Fed has actually pursued a policy of automatic accommodation. That is, additional & costless excess reserves were made available to the banking system whenever the bankers and their customers saw an advantage in expanding loans (but today, legal reserves are satisfied thru liquidity reserves, as the CBs meet 85 percent of their commitments thru applied vault cash.

    So, any member bank, lacking excess reserves (clearing balances), can just bid up the federal funds rate to the top of the bracket, thus triggering open market purchases, free-gratis bank reserves, more money creation, larger monetary flows (MVt), higher rates of inflation – and higher federal funds rates, more open market purchases, etc.

  3. Gravatar of Kenneth Duda Kenneth Duda
    24. March 2015 at 07:33

    I just realized your “lonely” link above links to the exact same Krugman post…

  4. Gravatar of flow5 flow5
    24. March 2015 at 07:36

    Discussions of interest, especially short-term rates, are usually couched in terms of the “money market”. As long as this is just a “street-wise” expression confined to the business community, no harm is done. Unfortunately, under the influence of the Keynesian dogma, academicians have been trying for too long to analyze interest rates in terms of the supply of, & demand for – money.

    A “liquidity preference” curve is presumed to exist which represents the supply of money. In this system interest is the cost which must be paid, if lenders are to forgo the advantages of liquidity. All of this has little or nothing to do with the real world, a world in which interest is paid on checking accounts.

    Interest, as our common sense tells us, is the price of obtaining loan funds, not the price of money. The price of money is the inverse of the price level. If the price of goods & services rises, the “price” of money falls. Interest rates in any given market at any given time are the result of the interaction of all the forces operating through the supply of, & the demand for – loan-funds.

    Loan-funds, of course, are in the form of money, but there the similarity ends. Loan-funds at any given time are only a fraction of the money supply — that small part of the money supply which has been saved, & is offered in the loan credit markets. Unfortunately, Keynesian economists have dominated the research staffs of the Fed, as well as the halls of academia.

    While monetary policy is formulated by the Federal Open Market Committee (FOMC), monetary procedures are determined by the “academic” research staffs. In their world, high interest rates are evidence of “tight money”, low rates of “easy money”; &, a proper rate of growth of the money supply is obtainable by manipulating a policy rate. Consequently, to bring interest rates down the money supply should be expanded & vice versa.

    The only instance in which an expansion of the money supply is synonymous with an increase in the volume of loanable funds involves an expansion of commercial bank credit. When the depository institutions make loans to, or buy securities from, the non-bank public, an equal volume of new money (demand deposits) is created. This expansion is made legally possible by a growth of legal reserves (clearing balances) in the banking system, which in turn is the consequence of net open-market purchases by the Reserve banks.

    To increase the volume of legal reserves in the member banks, the Fed buys governments, (usually T-Bills) in the open market in sufficient quantity to more than offset all legal reserve consuming factors (e.g., the withdrawals of currency from the banks by the non-bank public). These purchases tend to increase the price of bills, thus reducing their discounts (interest rates). The incremental reserves also add to excess reserves thus enlarging the supply of “federal funds”. Federal funds rates are thus held down, or are prevented from rising.

    The long-term effects of these operations on short-term rates are just the opposite. The banks are able to (& do) expand credit on a multiple basis relative to the additional excess reserves.

    This “multiplier effect” on the money supply, & money flows, puts additional upward pressure on prices. The long term effect, therefore, is higher inflation rates, & a higher “inflation premium” in both short & long-term interest rates.

    Higher interest rates consequently are not evidence of “tight money”; rather they are the consequence, over time, of an excessively easy (irresponsible) money policy – money expansion so great that monetary flows (MVt) substantially exceed the rate of expansion in real-output.

    While interest rates are not determined by the supply of & the demand for money, changes in the volume of money & monetary flows (MVt), as noted above, can alter rates of inflation &, therefore, the supply of, & the demand for – loan-funds.

    The significant effects of these monetary developments are long-term & involve an alteration in inflation expectations. Inflation expectations operate principally through the supply side for loan-funds. Specifically, an expectation of higher rates of inflation will cause the supply schedules of loan-funds to decrease. That is to say, lenders will be willing to lend the same amount only at higher rates.

    Under the assumption of increasing rates of inflation, the supply of loan funds would decrease in both a quantitative and schedule sense. I.e., lenders reduce the volume of loan funds offered in the markets & refuse to loan any particular volume of funds except at higher rates.

    At the same time supply is decreasing, the demand for loan -funds can be expected to rise as a consequence of the expected massive increases in federal deficits. With supply decreasing & demand increasing (in the schedule sense), there is only one way for interest rates to go – up.

  5. Gravatar of flow5 flow5
    24. March 2015 at 07:38

    “The demand for money should not be confused with the demand for loan-funds. The demand for loan-funds is not a demand for money, per se, but a demand which reflects the advantages of spending borrowed money. Insofar as there is a relationship it may be said that an increase in the demand for loan-funds tends to be associated with a decrease in the demand for money.” – L.J.P.

  6. Gravatar of J.V. Dubois J.V. Dubois
    24. March 2015 at 07:39

    Just finished Krugman’s piece. I am just wondering – does he feel lonely when Obama appoints people like CFO of community bank to FED or MMTer for chief economist of federal budget committee? I wouldn’t know because Krugman never writes anything if these things happen on the left.

  7. Gravatar of TravisV TravisV
    24. March 2015 at 08:01 Haha!

  8. Gravatar of foosion foosion
    24. March 2015 at 08:19

    >>I’m amused when people suggest that market monetarism is losing out among conservatives. The only conservatives who seem to even have a coherent set of views on monetary policy>>

    The complaint many have about the modern conservative movement and the GOP is that they often don’t require a coherent set of views to oppose something and they often make claims that bear no coherent relation to reality. Random example:

    Anyway, it’s quite possible to lose out among conservatives, even though they don’t have a coherent view on the subject.

  9. Gravatar of Peter K. Peter K.
    24. March 2015 at 08:21

    Krugman has written in favor of NGDP path level targetting.

    A Volcker Moment Indeed (Slightly Wonkish)
    OCTOBER 30, 2011 10:33 AM

    Christina Romer calls on Ben Bernanke to adopt a nominal GDP target, and suggests that he consider himself in a position comparable to that of Paul Volcker “” where Volcker took drastic action to fight inflation, Bernanke should do likewise to fight unemployment.

    I’m good with that. At the risk of reading the stage instructions, however, let me add that the Volcker parallel may run deeper than most people appreciate.

    You see, the early Volcker years were the period when the Fed at least claimed to have become monetarist, to be setting targets for monetary aggregates like M1 and M2 rather than interest rates. It didn’t last long; by the summer of 1982 the Fed had more or less thrown out the monetarist playbook.

    Yet the monetarist interval served a purpose: it gave the Fed a usefully euphemistic way to talk about its inflation-fighting strategy. Officials didn’t have to say, “We’re going to push the economy into a deep recession, and keep it there until inflation cries uncle.” Instead, they could talk in terms of M1 growth rates and credible long-run strategies and whatever, while in fact what they were basically doing was pushing the economy into a deep recession and keeping it there until inflation cried uncle.

    Nominal GDP targeting is quite a lot like that. To be sure, NGDP is a much better target than M1, which (it turns out) is subject to wide swings in velocity. And the Fed’s goals, if frankly stated, wouldn’t be nearly as politically explosive as what it was doing in 1979-82. Still, NGDP is arguably mainly a relatively palatable way to state a strategy that’s ultimately about something else.

    As I see it “” and as I suspect many people at the Fed see it “” the basic point is that to gain traction in a liquidity trap you must either engage in huge quantitative easing, raise the expected rate of inflation, or both. Yet saying this is very hard; people treat expansion of the Fed’s balance sheet as horrible money-printing, and as for the virtues of inflation, well, wear your body armor.

    But say that we need to reverse the obvious shortfall in nominal GDP, and you’ve found a more acceptable way to justify huge quantitative easing and a de facto higher inflation target.

    Don’t call it a deception, call it a communications strategy. And as I said, I’m for it.

  10. Gravatar of foosion foosion
    24. March 2015 at 08:22

    >>because Krugman never writes anything if these things happen on the left>>

    Sure he does. For example, he was quite negative on Obama for saying “small businesses and families are tightening their belts. Their government should, too.” He objected this went against textbook counter-cyclical policy and that the comparison of the government to family finance reflects a fundamental misunderstanding.

  11. Gravatar of flow5 flow5
    24. March 2015 at 08:26

    The prevailing hubris in the Fed’s technical staff, stemming from their Keynesian training: advises them that interest is the price of money, not the price of loan-funds (that there is no difference between money and liquid assets).

    They therefore decided that the money supply could be controlled through the manipulation of the federal funds rate (the rate paid by banks to banks holding excess legal reserves in the Reserve Banks).

    Money grew at less than a 2 percent rate in the decade ending in 1964. In the nine subsequent years money supply grew at a rate in excess of 6.5 percent…

    The problems originated from using the wrong criteria (interest rates as the FOMC’s operating tool, rather than member bank legal reserves) in formulating & executing monetary policy.

    Net changes in Reserve Bank credit (since the Federal Reserve Accord of 1951) were determined by the policy actions of the Federal Reserve. But William McChesney Martin, Jr. changed from using a “net free” or “net borrowed” reserve position approach to the Federal Funds “Bracket Racket” c. 1965. Note: the Continental Illinois bank bailout provides a spectacular example of this practice.

    The effect of these operations on interest rates (now via the remuneration rate), is indirect, and 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, & approximate control over the lending and money-creating capacity of the banking system.

    The money supply (& commercial bank credit), can never be managed by any attempt to control the cost of credit (i.e., thru pegging the interest rate on governments; or thru “floors”, “ceilings”, “corridors”, “brackets”, or the remuneration rate on excess reserve balances, etc.). In other words, Keynes’s liquidity preference curve (demand for money), is a false doctrine.

  12. Gravatar of flow5 flow5
    24. March 2015 at 08:34

    Peter K:

    “the early Volcker years were the period when the Fed at least claimed to have become monetarist, to be setting targets for monetary aggregates like M1 and M2 rather than interest rates”

    Paul Volcker’s version of monetarism (along with credit controls: the Emergency Credit Controls program of March 14, 1980), was limited to Feb, Mar, & Apr of 1980. With the intro of the DIDMCA, total legal reserves exploded at a 17% annual rate of change, & M1 exploded at a 20% annual rate (until 1980 year’s-end).

    Why did Volcker fail? This was due to Volcker’s operating procedure. Volcker targeted non-borrowed reserves when at times 10 percent of all reserves were borrowed. One dollar of borrowed reserves provides the same legal-economic base for the expansion of money as one dollar of non-borrowed reserves.

    The fact that advances had to be repaid in 15 days was immaterial. A new advance could be obtained, or the borrowing bank replaced by other borrowing banks. That’s before the discount rate was made a penalty rate. And the fed funds “bracket racket” was simply widened, not eliminated. Monetarism has never been tried.

    Then came the “time bomb”, (foretold), the widespread introduction of ATS, NOW, & MMMF accounts at 1980 year end — which vastly accelerated the transactions velocity of money (all the demand drafts drawn on these accounts cleared thru demand deposits (DDs) – except those drawn on Mutual Savings Banks (MSBs), interbank, & the U.S. government).

    This propelled nominal gNp to 19.2% in the 1st qtr 1981, the FFR to 22%, & AAA Corporates to 15.49%. My prediction for AAA corporate yields for 1981 was 15.48%.

    By the first qtr of 1981, the damage had already been done. But Volcker never changed policy (supplied an excessive volume of legal reserves to the banking system), as late as 1982-83.

  13. Gravatar of Brian Donohue Brian Donohue
    24. March 2015 at 08:43

    @Kenneth, It’s very simple: Keynesians favor fiscal policy, period. The smart ones, like Krugman, correctly perceive that the success of MM would sideline their cherished big government.

  14. Gravatar of flow5 flow5
    24. March 2015 at 08:46

    Monetary policy objectives should be formulated in terms of desired rates-of-change (roc’s), in monetary flows [ M*Vt ] relative to roc’s in real-gDp. Roc’s in nominal-gDp can serve as a proxy figure for roc’s in all transactions [ P*T ]. Roc’s in real-gDp have to be used, of course, as a policy standard.

    Given limited upward and downward price flexibility in our economy (e.g., sticky wages), it is axiomatic, that unless money flows expand at least as fast as “asked” prices, output can’t be sold, and hence jobs will be lost. I.e., where the roc in M*Vt (aggregate monetary purchasing power), exceeds R-gDp by 2-3 percent.

  15. Gravatar of SG SG
    24. March 2015 at 08:54

    A little off topic, but here’s a really great paragraph from a John Cochrane post:

    “First, “asset price inflation” sounds sexy, but our first duty as economists should be to help readers understand that relative price changes are not inflation. All relative price changes, including asset prices, are relative price changes, not inflations and deflations. Health cost “inflation,” wine “inflation” and chewing gum “inflation” are not inflation. Don’t encourage misuse of the word, misunderstanding of relative prices vs. price level, and consequent policy mistakes like using anti-inflation tools to manipulate relative prices.”

    I know Scott derides the concept of inflation as arbitrary and illogical (I agree), but we are kind of stuck with it, and Cochrane does a great job of explaining the terrible ways that people misure it.

  16. Gravatar of Bob Murphy Bob Murphy
    24. March 2015 at 09:13

    Scott wrote:

    But gosh darn it there must be some reason the Fed needs to raises interest rates, because . . . well, just because.

    Scott, you are a formidable opponent, so I appreciate that you tell your readers that your critics literally have no arguments. Then they’ll be shocked to see that actually the WSJ (and others) *do* have arguments. We need all the help we can get!

  17. Gravatar of Thomas Aubrey Thomas Aubrey
    24. March 2015 at 09:25


    It’s worth noting that many economists who are sympathetic to a monetary policy involving a nominal income target would support a tightening of monetary policy now given the current rate of NGDP.

    For example, George Selgin commented in response to your article here that a five percent target is a “dangerously high figure “” one that is less likely than lower rates to maximize welfare in the long run, yet more likely to perpetuate boom-bust cycles.”

    George noted that a 2 – 3% target would be more appropriate.

  18. Gravatar of flow5 flow5
    24. March 2015 at 09:48

    A five percent target is a “dangerously high figure”.

    How so? Money flows dictate N-gDp.

    Parse columns;,,,,,real-output,,,,,inflation,,,,,bond proxy:

    01/1/2015 ,,,,,,, 0.13 ,,,,,,, 0.31 ,,,,,,, 0.33
    02/1/2015 ,,,,,,, 0.09 ,,,,,,, 0.31 ,,,,,,, 0.31
    03/1/2015 ,,,,,,, 0.10 ,,,,,,, 0.29 ,,,,,,, 0.31
    04/1/2015 ,,,,,,, 0.12 ,,,,,,, 0.32 ,,,,,,, 0.31
    05/1/2015 ,,,,,,, 0.10 ,,,,,,, 0.35 ,,,,,,, 0.30
    06/1/2015 ,,,,,,, 0.14 ,,,,,,, 0.34 ,,,,,,, 0.30
    07/1/2015 ,,,,,,, 0.12 ,,,,,,, 0.32 ,,,,,,, 0.30
    08/1/2015 ,,,,,,, 0.10 ,,,,,,, 0.31 ,,,,,,, 0.30
    09/1/2015 ,,,,,,, 0.10 ,,,,,,, 0.31 ,,,,,,, 0.31
    10/1/2015 ,,,,,,, 0.03 ,,,,,,, 0.26 ,,,,,,, 0.31
    11/1/2015 ,,,,,,, 0.06 ,,,,,,, 0.25 ,,,,,,, 0.31
    12/1/2015 ,,,,,,, 0.05 ,,,,,,, 0.17 ,,,,,,, 0.30

    The Fed will raise rates in 2015 because of the bond proxy.

  19. Gravatar of Ray Lopez Ray Lopez
    24. March 2015 at 09:56

    Peter K correctly cites Krugman as for NGDPLT, since it’s a backdoor way of massive money printing but in a camouflaged manner. Krugman at least on this issue is intellectually honest.

    Flow5 seems to understand that the Volcker narrative that the Fed “broke the back of inflation by consistently raising interest rates” is false. Kudos if so.

    Sumner: “I have a new post on Stanley Fischer over at Econlog.” – I am rather waiting for the post on Fisher Black.

  20. Gravatar of TravisV TravisV
    24. March 2015 at 10:14

    Brad DeLong (paraphrasing): While I think the current price of long-term bonds might be irrational, I’m uncomfortable using the word “bubble.”

  21. Gravatar of TravisV TravisV
    24. March 2015 at 10:17

    I liked this recent post by Lars Christensen:

  22. Gravatar of flow5 flow5
    24. March 2015 at 10:40

    The Fed doesn’t have to hike rates. It has to control money stock growth. The 2 objectives are diametrically opposed. The Fed can lower rates and tighten at the same time. It would be even easier if the member banks were nationalized (eliminating their sovereign right to create new money).

  23. Gravatar of Becky Hargrove Becky Hargrove
    24. March 2015 at 10:40

    The important thing is that George Selgin and Scott Sumner are actively working together for the implementation of the same rule. That rule needs to be established before growth rate targets can even be considered. What’s more, the eventual growth rate depends on whether real gains are made in production reform for the supply side.

  24. Gravatar of Anthony McNease Anthony McNease
    24. March 2015 at 11:05

    Scott, I’ve been a WSJ subscriber for several years now, and the editorial board has never liked an expansive monetary policy and has special animus for QE. The WSJ board has thoroughly bought into the idea that the Fed’s “loose” money caused a housing bubble that inevitably burst. For a while I thought they weren’t serious. That they really just wanted higher margins for banks. But I’ve since changed my hypothesis. They are certifiably Austrian.

  25. Gravatar of Zack Zack
    24. March 2015 at 11:41

    Foosion, That USA Today piece is more evidence of how much of a joke these phony “fact checks” have become. Anyone who needs further proof should check out this monstrosity from Politifact:

    Somehow they rated this absurd claim as “Mostly True”

  26. Gravatar of ssumner ssumner
    24. March 2015 at 12:12

    Ken, Yes, he’s commented, but only briefly–nothing substantive.

    foosion, Agreed, but we are clearly gaining strength, not losing it. My point is that it’s easier to gain strength when the other side has no good arguments.

    We are also gaining strength among liberals.

    Peter, Thanks, that’s worth a post.

    Brian, That may be true, but unfortunate. Fiscal policy has nothing to do with big government. That’s why Krugman favors higher taxes on the rich. He wants big government more than he wants fiscal stimulus.

    SG, Cochrane is right.

    Bob, Actually they don’t, at least not once you remember that the WSJ thinks the Fed should target inflation, not unemployment.

    Thomas, The exact rate is far less important that the concept of NGDP targeting. But even George admits that it was a huge mistake to suddenly slow NGDP growth (from the 5% trend) right in the middle of the 2008 banking crisis.)

    I don’t agree with the claim that 5% NGDP growth is more likely to lead to financial instability than 3%.

    Anthony, Interesting, so what do they want the Fed to target? One of the problems with the article I cited is that they don’t provide any context, you can’t beat something with nothing.

    Back in the 1980s they had a supply-sider view of monetary policy. Now they’ve shifted to Austrian? Again, what’s the plan? They don’t tell us.

  27. Gravatar of Anthony McNease Anthony McNease
    24. March 2015 at 12:31


    “Anthony, Interesting, so what do they want the Fed to target?”

    I can’t remember them recommending a specific, or even general, regime. The criticisms have amounted to equating QE with fiscal stimulus and calling it “Keynesian.” Here is the editorial published with the announcement of Yellen as Chairman in Oct 2013:

    If this is behind the paywall, the sub-headline is: “The Tobin Keynesians are back in charge at the Federal Reserve.”

    Here are excerpts:

    “Ms. Yellen is a distinguished academic economist but she is also an unreconstructed Keynesian. She studied under James Tobin, the late Yale economist whose ideas dominated American economic policy from the 1950s through the 1970s. Friedman monetarism was in part a revolt against the Tobin school, which to oversimplify made unemployment a central focus of monetary policy. In the Tobin-Yellen view, the first task of a central banker is to promote full employment rather than to maintain price stability.

    This is the intellectual underpinning to keep in mind when you read that Ms. Yellen favors “easy money” or is a monetary “dove.” And it has consequences that are likely to appear over time if she is confirmed by the Senate as expected.”


    “Ms. Yellen’s defenders says she really isn’t a dove and they point to her 2006 warning about a housing bubble and its risks for the larger economy. Full marks for that. But the problem is that by 2006 the mortgage-securities and housing bubbles were so large and distended that substantial economic harm was inevitable. The time for the Fed to have begun tightening was in 2003 and 2004 when it was keeping interest rates at 1%-2% even as the economy was growing by nearly 4% a year and commodity prices were exploding. Ms. Yellen was no great public dissenter from that historic Greenspan-Bernanke mistake.”


    “Our view of the Bernanke era is that he contributed greatly to creating the bubble and panic, then acted admirably and creatively to stem the crisis. His policy since the recovery has failed to live up to its growth expectations, and now the verdict of history will depend on a monetary exit that Ms. Yellen will steer.”

  28. Gravatar of Thomas Aubrey Thomas Aubrey
    24. March 2015 at 12:45


    Judging from George’s article it appears he doesn’t agree with your claim that 5% is a good target though.

    The point I’d like to make is that you’d be surprised how many credit market practitioners and policy advisers in finance ministries are interested in a nominal income target. The challenge as I see it, is that these differences (2% between friends) make turning a nominal income target into a reality a much harder sell.

    From your blogs it seems you believe in EMH at the macro level and therefore that there cannot be such a thing as excess credit growth. I’d say many market practitioners and Treasury officials would disagree with this claim, which makes the 5% target a potential obstacle.

    I actually think you are much further along winning the argument than you realise, but the last mile – replacing the inflation target – will take some doing.

  29. Gravatar of Charlie Jamieson Charlie Jamieson
    24. March 2015 at 13:14

    In theory, conservatives favor tight money, as they perceive that tight money will limit inflation and preserve the value of their loans.
    Liberals favor loose money, as they are generally feel they are representing borrowers, who wish to have easier access to credit and to make it easier to pay down those loans.
    In practice, however, it does seem that right now the market wants low rates forever.
    I think the WSJ believes (and I agree) that easy money, especially created in government guaranteed loans triggered the crisis, and the refusal to let the guilty parties take their lumps has created the hangover.
    Recognizing that easy money created this crisis, we worry it will create the next crisis.

  30. Gravatar of Benoit Essiambre Benoit Essiambre
    24. March 2015 at 14:47

    I find conservatives libertarian types often start to get it when I emphasize the fact that sufficiently negative returns on fiat is the free market “laissez faire” approach while hard money, is the statist, market distorting way.

    Advocates of hard money seem to think that if the government is to control the value of a fiat currency, it should ration it to maintain value at a high rate even when, if you were to go to private markets to store your wealth, the real returns on risk adjusted safe stores of value would be quite negative.

    This hard money stance basically amounts to wanting the government to provide a subsidy to fiat holders, getting them above market risk adjusted returns on their savings.

    If we were to replace government fiat by competing private currencies that were not backed by the formidable legal framework of a government, these currencies would never be able to keep risk adjusted value above market rates as well as government ones.

    Currencies cannot keep above market returns without becoming unstable since unlike investment, the accumulation of money is not tied to future economic production, accumulating idle excess money in the economy doesn’t allow people to get more stuff later overall. When the average subsidized money holder will want to reduce the amount of work he or she does and rely on currency savings to consume, since the extra idle money has not been turned into investment to increase production, you will get more money chasing not more goods and there will be pressure on prices to rise. We see this volatility in bitcoins for example.

    The hard money, Austrian position to get government fiat’s value storing ability to be artificially propped up above what the markets can provide is hugely distorting and detrimental to the private investment and labor markets. As well as being very destructive to the private economy, it is a very statist position to take. If you want government fiat to have less importance compared to private stores of value, you want it to devalue faster, not keep its value above market rates.

    The terrible thing is that saving in excess fiat, unlike investment, doesn’t add value to the aggregate economy, it is purely a claim on other people or businesses’ stuff, it has a return to the aggregate of near -100% when it is made idle. So people moving their savings from a private say -4% real return investment to a -2% returning idle excess fiat are actually removing something like -96% of the value of their saving from the economy. Since idle excess cash doesn’t provide its own value to the economy, the stuff that will be bought with it when it starts moving will have to come out of the production from other investments. It will basically have to be a forced redistribution from private investors to government fiat savers.

    That is, in order the make excess fiat savings keep their whole government promised real worth when people want to spend them and velocity starts to rise, central banks will need to be overly tight, which will lower the worth of other forms of savings and push taxes up, effectively a forced transfer of wealth from entrepreneurs, businesses, stock holders, bond holders and tax payers to fiat holders. That is also why businesses and banks don’t invest when the economy is heading towards this. They know that part of the value they create will be forcibly diverted to fiat holders if central banks continue their promised overly tight money policy. They’d rather be fiat savers themselves and capture the subsidy.

    Another way to see it is that fiat paper being propped up to keep value so much above what it intrinsically has, can be seen as a government distortion. Devaluing fiat is letting it get closer to the value this paper would have if central banks and governments were not manipulating it into being so high.

    Some people try to retort that negative returns are always unnatural in private markets. But before financial systems existed, almost all stores of value, all investments, had negative returns if you didn’t put work and energy into them. The only way you had to store value was to accumulate stuff, buildings or land. All of these had high maintenance costs, were subject to risk of damage from natural causes, theft etc. or required hard labor to get production out of.

    Even in societies with good financial systems, getting risk free, hassle free positive real returns has been difficult for most of history. This probably reflects the laws of thermodynamics that tell us that things tend to decay without work and energy put into them.

    The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free returns were easy to find. This however, may not continue forever.

    The last point that helps conservative understand, which is often made by Scott, is that that keeping money tight actually forces central banks to print more as it raises demand for money. If you want higher rates, you need central bank to lower them first. Reverse pendulum etc…

  31. Gravatar of Derivs Derivs
    24. March 2015 at 14:59

    “Brad DeLong (paraphrasing): While I think the current price of long-term bonds might be irrational, I’m uncomfortable using the word “bubble.””

    The past is far from a perfect indicator of the future but… had you rolled 3 month paper for the last 10 years you would have averaged a 1.38% return.

  32. Gravatar of bill woolsey bill woolsey
    24. March 2015 at 15:07


    I support a 3% NGDP growth path. Scott favors a 5% NGDP growth path.

    What is the difference? The trend inflation rate.

    If potential output grows three percent, then 3% NGDP implies a stable trend price level. A 5% NGDP growth path implies 2% trend growth path for the price level.

    With price stability, the growth rate of the nominal money supply and nominal credit will be slower, but the nominal demand for credit will also grow more slowly.

    With the 2% trend inflation, the growth rate of the money supply and credit aggregates are faster, but so is the nominal growth in the demand for credit.

    At first approximation, the real supply and demand for credit will grow the exact same and the real interest rate will also be the same.

    Now, there might be some small effect on the growth path of the real monetary base, with it being lower with the 5% NGDP growth path and higher with the 3% NGDP growth path.

    The notion that the real amount of credit will be higher or the real interest rate lower so that the economy will run “hot” to keep prices rising 2% has been proven

  33. Gravatar of bill woolsey bill woolsey
    24. March 2015 at 15:45


  34. Gravatar of benjamin cole benjamin cole
    24. March 2015 at 16:31

    The persistent fixation of the American right wing with ever tighter money is a puzzle.

    I can only conclude the rightie-tightie position is based in some type of sociopathology and not in macroeconomics.

    Former Dallas Fed Bank President Richard Fisher once complained that wages in Texas were rising faster than the rate of inflation. Ergo, he wanted tighter money.

    Perhaps the rightie-tighties believe that tight money will whack labor and that’s a lot of fun.

  35. Gravatar of Major.Freedom Major.Freedom
    24. March 2015 at 18:05

    Market monetarists have no argument for why the Fed should not tighten. Literally no argument whatsoever. We’re told the Fed can’t tighten because…well just because.

    It should not be surprising why it isn’t being taken seriously by most conservatives.

  36. Gravatar of The WSJ wants to raise interest rates; now they just need to find a reason « Economics Info The WSJ wants to raise interest rates; now they just need to find a reason « Economics Info
    24. March 2015 at 19:00

    […] Source […]

  37. Gravatar of Edward Edward
    24. March 2015 at 19:22

    I know you are but what am I,
    As usual, pathetic.

    Market monetarists say least care about the unemployed unlike “rightie tighties” (thanks ben cole) who I can only conclude must enjoy watching workers suffer based on absurd “mis-allocation” disproven nonsense.

    On other issues, market monetarist a are more libertarian than traditional Keynesians. They are pragmatists who would rather have three quarters of a loaf of bread rather than nothing at all. (We witnessed the absurdity of the all or nothing crowd when the house tried to abolish Obamacare what, 43 times? Despite knowing it would never pass the senate)

    The great weakness of the right has always been tight money, which usually after being implemented by the Crypto-Austrian right
    Has elected leftists to power.

    Or much, much worse, as is the case with chancellor Bruëning in Germany.

  38. Gravatar of Thomas Aubrey Thomas Aubrey
    25. March 2015 at 00:29

    Bill, thanks for the clarification.

    If 3% NGDP implies a stable price level, then productivity is also stable. But if we either get a rise or fall in productivity then the price level will not be stable. It seems to me at least that David Beckworth’s approach here resolves this rather well.

    One further challenge is that in a 5% NGDP target, although inflation may well be stable, it still may stimulate credit growth, much of which will not be ploughed into the real economy, thereby having a very limited impact on inflation – but more on asset prices. (A point made by Bertie Ohlin in the 1930s). If you believe in EMH at the macro level, I accept that this isn’t an issue. However convincing policy makers of this will be far harder than trying to implement a nominal income monetary policy.

    Would be great to see a MM conference organised with the aim to come to a greater consensus on what specific rule policy makers could use to replace current regimes.

  39. Gravatar of Michael Byrnes Michael Byrnes
    25. March 2015 at 02:54

    Thomas Aubrey wrote:

    “If 3% NGDP implies a stable price level, then productivity is also stable. But if we either get a rise or fall in productivity then the price level will not be stable.”

    A 3% NDGP level target does not imply a stable price level in the short run. In the short run, the price level would change (rise or fall) as a result of supply or productivity shocks. The long run trend rate of inflation would be 0% (assuming 3% real growth) but over shorter periods of time some inflation/deflation would be expected – these would be good, though – changes in prices in response to changes in supply.

  40. Gravatar of Ray Lopez Ray Lopez
    25. March 2015 at 02:57

    It’s sad to read these comments, and to see the brainwashing in most people posting here. They are True Believers like Duda and Sumner who think printing money will magically usher in a New Age. Or faith-based theorists like this joker: “The terrible thing is that saving in excess fiat,”… it’s a terrible thing for somebody to work hard and save rather than spend Other People’s Money? Sad.

  41. Gravatar of Benoit Essiambre Benoit Essiambre
    25. March 2015 at 04:52

    It’s not bad for people to save Ray. It’s bad for people to save on the aggregate in uninvested idle government fiat. Unlike private investment, fiat doesn’t bear any economic substance. An increase in fiat doesn’t increase the amount of available stuff or production in the economy. Fiat is ultimately the least economically backed form of debt. No private party has promised to do the work to produced the stuff this money will try to purchase.

    People are only able to get above market value out of excess idle fiat they want to spend if the government manipulates it into keeping this value by depressing other forms of savings worth and basically transferring the wealth of real investors to excess fiat spenders who have not contributed to building real value in the economy.

  42. Gravatar of ssumner ssumner
    25. March 2015 at 04:57

    Anthony, Yes, that’s pretty Austrian. But unless they tell us what the target should be, their criticism has zero credibility. You can’t beat something with nothing, and you can’t criticize monetary policy without an alternative.

    Thomas, Even if I am 100% wrong about the EMH, that issue has no bearing at all on the 3% vs. 5% debate. Bubbles are no more likely to form at 3% trend growth than 5% trend growth. Indeed during American history “bubbles” have tended to occur when NGDP growth rates are fairly low for an expansion.

    You also overrate the importance of the disagreement between George and I. Obviously neither of us will have any say in the number chosen, it will depend on the consensus of the profession. In my view the actual number will end up being the estimated trend rate of RGDP growth plus 2%. My best guess is that we’d end up with about 4%, as most estimates of trend RGDP growth going forward are close to 2%, maybe 2.5%. (I think actual trend growth is even lower.)

    You also state that I favor 5% target. That’s not quite right. I usually mention 5% because that was the trend before the crisis, and I think it would be an OK choice. But the optimal target growth rate depends on many factors. For instance, if we chose level targeting then the optimal growth rate is lower than if we choose growth rate targeting. If we abolish taxes on capital then the optimal growth rate is higher than if we have taxes on capital.

    I also think the rate should be done on a per capita basis, or per working age adult.

    Charlie, Some day you’ll have to tell me what easy money is, it should be good for a few laughs.

    Benoit, I think it’s a mistake to focus on the Austrians. There are not the group whose mind we need to change in order to get this policy enacted. Like the MMTers, (and us MMs as well) they have essentially zero influence on policy.

    I’d add that some Austrians support NGDP targeting, so it is a diverse group.

    Bill, And of course I’d be fine with a NGDPLT policy of 3%.

    Thomas, It’s a myth that money or credit get “ploughed into” the real economy or the asset markets. When someone buys a share of stock someone else sells. Money doesn’t go into markets.

    Ray, You need to go back to those blue and tan boxes, and take another look. On average, babies learn at 8 months that when an object goes behind another object, it’s actually still there. Time for you to learn the same. After all, your IQ can’t have fallen THAT far below 120, can it?

  43. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    25. March 2015 at 06:34

    All, I agree with Sumner that the chosen target rate has no bearing on the possibility of bubble formation. Other micro factors are much more important. But on the fixation on (less) money growth that conservatives show, I think they are missing the point. I consider myself a very conservative person in economic issues, and I think nominal GDP targeting is a great nominal anchor, it suits our state of knowledge and financial technology. I think that people that are fixated on the Gold Standard fail to realize that the Gold Standard worked for a long time because it was a NOMINAL ANCHOR that was well adapted for the knowledge and technology levels of its time. Today we have more information, knowledge and financial technology to do better. Let’s do better then …

  44. Gravatar of Dan W. Dan W.
    25. March 2015 at 07:08

    From 2003 through 2007 the US economy (GDP) experienced 5.5% annual growth. Was that growth sustainable? How?

    Who was going to keep buying houses for no one to live in?
    Who was going to keep building houses for no one to buy?
    Who was going to keep lending money that was not going to be paid back?

    There is one way the US economy could be fixed to provide renewed growth. That would be to restructure outstanding debt and to “clear the books” of bad loans. That is how “business” does it, or at least how it used to do it. That is not happening much now and consequently it is no surprise that economic growth remains sluggish.

    Great monetary interventions are helpful for sustaining zombie economics. But can they bring the dead back to life? The history of such things does not give much hope.

  45. Gravatar of TallDave TallDave
    25. March 2015 at 07:47


    That’s actually a great example of how the left simply tells itself whatever it wants to believe about the conservative movement, often in the guise of “fact-checking” by Democrat-dominated organizations like Politifact or, thereby ignoring all substantive complaints. The attempted AR-15 ammunition ban was a serious issue that raised serious complaints. The millions of people forced off their insurance by PPACA is a serious problem. The fact that members of Congress generally do not have to use PPACA to get health insurance is, well, a fact.

    The right is certainly no less wont to tell itself pleasing fictions, but it at least has the self-awareness (or lacks the shamelessness) to not stamp such attempts as objective reality.

  46. Gravatar of Charlie Jamieson Charlie Jamieson
    25. March 2015 at 08:02

    Easy money?
    Well, that’s ‘easy.’
    You measure the expansion of credit. (You should also measure the quantity of the credit created but that appears to be difficult to do.)
    In the run-up to the financial crisis, we had rapidly expanding credit with an unhealthy amount going into unproductive pursuits. Money was ‘easy.’
    After the crash, credit expansion stalled. Money was tight.
    I think interest rates plays a role, but not so much as other factors — investor sentiment, business opportunities, productivity, regulations, rule of law, war, demographics.
    Whenever credit expansion starts going into non productive areas, we have a reckoning. We try to use monetary and fiscal policy to influence credit expansion, but there are other factors that are often neglected.

  47. Gravatar of foosion foosion
    25. March 2015 at 09:56


    >>The millions of people forced off their insurance by PPACA is a serious problem.>>
    Millions of people have had the terms of their insurance change or had to switch insurance companies. A small number don’t like the change and didn’t re-up. This has been happening for years – for example, prices change, coverage changes, network changes, employer switches carrier, etc., etc. What’s different at the moment is the sharp decline in the number of uninsured.

    >>The fact that members of Congress generally do not have to use PPACA to get health insurance is, well, a fact.>>
    They no longer have the govt issued insurance they used to have. They can buy health insurance through the exchanges, or otherwise, same as anyone else.

  48. Gravatar of TallDave TallDave
    25. March 2015 at 10:17


    Obama promised if you liked your plan, PPACA wouldn’t kick you off it. That wasn’t true, and that’s what Cruz is running against. The fact that people lose insurance for other reasons is a ridiculous defense.

    Cruz has made a point of signing himself up for Obamacare. Members of Congress have resources that average people do not, to put it mildly.

  49. Gravatar of TallDave TallDave
    25. March 2015 at 10:20

    Also, yes, you can make the number of uninsured smaller by making it illegal to be uninsured, but that doesn’t necessarily make anyone better off (see e.g. the Oregon study).

  50. Gravatar of Student Student
    25. March 2015 at 10:28

    Since when do conservative republicans rely on good arguments or evidence of any kind?

    I mean, according to PEW, 57% of republicans do not believe humans have evolved. 63% of conservative republicans do not believe the earth is warming.

    Why on earth would you think that any kind of argument is going to win over people like that?

  51. Gravatar of ssumner ssumner
    25. March 2015 at 11:44

    Jose, It’s a waste of time to even talk about the gold standard coming back. Anyone who thinks it will return should be ignored for that reason alone, even if all of the rest of their economic analysis is excellent.

    Dan, Neither nominal nor real GDP grew at that rate. So your numbers are wrong either way. If you want to be taken seriously in the future, you ought to at least mention whether you were talking about nominal or real GDP.

    Of course any NGDP growth rate is sustainable.

    Charlie, You are confusing money and credit. That’s an elementary mistake explained in EC101.

    Student. That’s a truly silly comment. Tens of millions of Dems don’t believe in evolution, or are terrified of GMOs. I’m not trying to convince anyone who doesn’t believe in evolution. Those fools have no impact on monetary policy.

    The people I’m trying to influence are not the Rays, Charlies and Dans of the world, but rather highly educated people who might be in a position to influence monetary policy.

  52. Gravatar of Charlie Jamieson Charlie Jamieson
    25. March 2015 at 11:47

    In today’s economy, money is credit.

  53. Gravatar of Student Student
    25. March 2015 at 12:01

    Your right, tens of millions of dems don’t believe in evolution, however, it is certainly not symmetric.

    Its 57% for repubs, 33% for dems. Sure that’s just one example but the point is on average, dems are much more open to evidence than repubs. That was my point and I think the evidence is in support of that.

    As a result, I don’t think that is a silly comment at all and I think that’s why you are going to have an uphill battle convincing conservatives using powerful arguments and evidence. They simply don’t care as much about evidence as other groups.

  54. Gravatar of flow5 flow5
    25. March 2015 at 12:29

    “The WSJ board has thoroughly bought into the idea that the Fed’s “loose” money caused a housing bubble that inevitably burst”

    That’s right. If the G.6 release was still published, you could see that bank debits (reflecting new and existing CE and RE sales, or Vt), vaulted.

    But you can still see that Greenspan never tightened (long-term roc’s were always positive, i.e., despite 17 consecutive rate hikes); and then Bernanke never eased (long-term roc’s were literally negative and contrationary, first for 29 contiguous months, not just decelerating). Then short-term flows (proxy for real-output), collapsed by -160 percent between July and October 2008)…

    I.e., Bankrupt U Bernanke turned safe-assets into impaired ones.

    You can’t manage the money stock with interest rates. There are always infrequent, sudden and wide swings in AD, stemming from sudden and wide swings in the roc’s of M*Vt.

  55. Gravatar of Charlie Jamieson Charlie Jamieson
    25. March 2015 at 12:39

    Flow, don’t you think Greenspan’s policy contributed to a dangerous situation, so when Bernanke tried to address the situation, it blew up.
    Bernanke could have tightened, loosened, lit himself on fire on national TV … wouldn’t have mattered. The party was over.

    Banks exploited the government guarantee on mortgages. Normally a bank issues deposit with a loan and if the loan goes south, the bank loses capital. But with the guarantee on mortgages, the banks could issue loans to anybody, and then make leveraged plays on those loans. Didn’t matter if the borrower defaulted; the government was there to rescue the bank. So all kinds of foolish, unproductive loans were made.

  56. Gravatar of Thomas Aubrey Thomas Aubrey
    25. March 2015 at 14:21


    “When someone buys a share of stock someone else sells.”

    Yes that’s true, but it depends on where the money is directed in the economy. For example in 2006 I could have invested $50m in Theranos, which may well be about to dramatically improve the productivity of healthcare delivery through its blood diagnosis product. This money would have been directly invested in R&D in return for a claim on a % of future profits from that firm.

    I could also have invested $50m in sub prime mortgage bonds. As you can see from this paper demand for these assets rocketed in 2005 and 2006 (graph 1) because investors thought they were getting high returns on AAA paper based on the assumption that house prices would continue to rise. Rising house prices also caused consumers to increase their level of leverage to profit from future rising prices. Most of those selling houses at higher prices generally recycled the money back into the housing market to buy more expensive houses at even higher prices. This process of reflexivity is only sustainable if house prices keep on rising. When the housing market stopped rising, you can see the impact on investor portfolios. The ABX index for the BBB 06 vintage by the middle of 2007 had nearly lost around 60% of its value (graph 3a).

    Investing in a financial asset where that money is used to fund R&D to generate productivity growth as opposed to investing in an existing asset (eg real estate) where the profits are recycled to buy more of the same asset driving up prices even further impact the economy in quite different ways. I dont think it unreasonable to classify the former as a productive investment and the latter as an unproductive one given it didn’t do anything to increase productivity growth.

    Thanks for clarification on your 5% figure, although I still favor a productivity norm approach.

  57. Gravatar of ssumner ssumner
    25. March 2015 at 14:22

    Student, You really are making a fool of yourself. You think people like Mankiw and Taylor don’t believe in evolution?

    And this comment

    “That was my point and I think the evidence is in support of that.”

    Has been repudiated many times. But if you are stuck in the liberal echo chamber and read nothing else, then you don’t know about all the examples of liberals denying this or that scientific theory about GMO food, vaccines, gender differences, unemployment compensation, etc., etc. Liberals like to pick a set of issues where most conservatives tend to be wrong. Big surprise, they find what they are looking for.

    Watching Flow debate Charlie is like watching a toaster debate a lawnmower.

    Maybe I should just end the comment section, it can’t get any dumber.

  58. Gravatar of flow5 flow5
    25. March 2015 at 14:31

    Charlie Jamiesond:

    Regulatory malfeasance goes part and parcel with easy money. Easy money encourages risk taking (speculation), as well as regulatory arbitrage and avoidance. E.g., financial transactions ebb and flow with easy and tight money.

    No, there was no land grab. The Homestead Act of 1862 was repealed by the Federal Land Policy and Management Act of 1976.

    Inflation cannot occur unless fueled by a chronic increase in the volume and/or velocity of money. A chronic increase in means-of-payment money cannot occur unless the FED, opens the spigots.

    The price level = money times its rate-of-turnover. CE and RE acquisitions would be reflected by their demand-deposit turnover (new and existing).

    Essentially the Fed controls the demand side of “asked” prices (including real-estate prices). Coterminous with Bernanke’s reversal in policy (tightening), the Case/Shiller home price index peaked and reversed, declining pari passu with his draining of reserves (as he let the air out). Tradable assets transmogrified into underwater liabilities, and thus were shunned.

  59. Gravatar of Chuck E Chuck E
    25. March 2015 at 14:59

    I’m guessing that Kevin Erdmann is reading these last few posts with “white knuckles.” This is exactly the false story he has proved in his excellent blog.

  60. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    25. March 2015 at 15:37

    Mr. Sumner,
    I used it as a “general tag” for all tight money conservatives generally like… I also wanted to point out that the gold standard “worked” in the past, in my view, because it was a nominal anchor, before anything else…

  61. Gravatar of flow5 flow5
    25. March 2015 at 15:41

    Dumb, dumber, and dumbest:

    M1 growth peaked in Dec 2004. It wasn’t surpassed for over 4 years. But money flows continued to increase until Bernanke was appointed Chairman. Then Bankrupt U Bernanke slammed on the brakes for 29 contiguous months:

    2006 jan ,,,,,,, 0.04
    ,,,,, feb ,,,,,,, 0.01
    ,,,,, mar ,,,,,,, -0.02
    ,,,,, apr ,,,,,,, -0.03
    ,,,,, may ,,,,,,, -0.02
    ,,,,, jun ,,,,,,, -0.01
    ,,,,, jul ,,,,,,, -0.03
    ,,,,, aug ,,,,,,, -0.06
    ,,,,, sep ,,,,,,, -0.08
    ,,,,, oct ,,,,,,, -0.08
    ,,,,, nov ,,,,,,, -0.06
    ,,,,, dec ,,,,,,, -0.07
    2007 jan ,,,,,,, -0.11
    ,,,,, feb ,,,,,,, -0.09
    ,,,,, mar ,,,,,,, -0.11
    ,,,,, apr ,,,,,,, -0.09
    ,,,,, may ,,,,,,, -0.05
    ,,,,, jun ,,,,,,, -0.05
    ,,,,, jul ,,,,,,, -0.08
    ,,,,, aug ,,,,,,, -0.07
    ,,,,, sep ,,,,,,, -0.07
    ,,,,, oct ,,,,,,, -0.04
    ,,,,, nov ,,,,,,, -0.04
    ,,,,, dec ,,,,,,, -0.04
    2008 jan ,,,,,,, -0.07
    ,,,,, feb ,,,,,,, -0.05
    ,,,,, mar ,,,,,,, -0.04
    ,,,,, apr ,,,,,,, -0.03
    ,,,,, may ,,,,,,, -0.01
    ,,,,, jun ,,,,,,, -0.04
    ,,,,, jul ,,,,,,, -0.03

    The distributed lag effect of money flows has been a mathematical constant for over 100 years.

  62. Gravatar of flow5 flow5
    25. March 2015 at 15:48

    Then short-term money flows fluctuated widely and peaked in July 2008:

    POSTED: Dec 13 2007 06:55 PM |

    The Commerce Department said retail sales in Oct 2007 increased by 1.2% over Oct 2006, & up a huge 6.3% from Nov 2006.

    10/1/2007,,,,,,,-0.47 * temporary bottom
    11/1/2007,,,,,,, 0.14
    12/1/2007,,,,,,, 0.44
    01/1/2008,,,,,,, 0.59
    02/1/2008,,,,,,, 0.45
    03/1/2008,,,,,,, 0.06
    04/1/2008,,,,,,, 0.04
    05/1/2008,,,,,,, 0.09
    06/1/2008,,,,,,, 0.20
    07/1/2008,,,,,,, 0.32
    08/1/2008,,,,,,, 0.15
    09/1/2008,,,,,,, 0.00
    10/1/2008,,,,,,, -0.20 * possible recession
    11/1/2008,,,,,,, -0.10 * possible recession
    12/1/2008,,,,,,, 0.10 * possible recession
    Trajectory as predicted:

  63. Gravatar of flow5 flow5
    25. March 2015 at 15:55

    Then as the economy was in a free-fall, Bankrupt U Bernanke introduced the payment of interest on excess reserves (the economy’s coup de grâce) inducing dis-intermediation among just the non-banks (83 percent of the lending market pre-Great-Recession).

    And paying interest on reserves is tantamount to Raising Reg. Q ceilings for the CBs in Dec 1965. I.e., no one understands money and central banking, or the difference between money and liquid assets, between money creating depository institutions and conduits between savers and borrowers…

  64. Gravatar of Charlie Jamieson Charlie Jamieson
    25. March 2015 at 17:17

    Hi, Scott
    The personal insult is not necessary.
    If you don’t want comments, why not just close the comment section. Or perhaps you should just hire a moderator to delete those who disagree or ask challenging questions.

    My reading of the financial crisis as an unproductive exercise in credit expansion that ultimately seized up is fairly conventional. The events post-crash in which the Fed flooded the banks with reserves and drastically lowed rates — but still failed to get that money flowing into the economy (through lending) should have discredited those ideas, but it hasn’t.
    Too many people still believe that banks ‘lend out reserves’, or that banks ‘lend out deposits’ or that the money multiplier exists.
    And I can find many economists who find your pet theory to be wishful thinking at best.
    If you want to debate your ideas in a vigorous fashion, then do so, but without the insults.

  65. Gravatar of flow5 flow5
    25. March 2015 at 17:37

    “should have discredited those ideas”

    Remunerating reserves is designed so that the banks won’t invest – not lend (formally, a self-correcting, and countercyclical, free-market, mechanism). Between 1942 and Oct 2008, the CBs always remained fully lent up, by buying short-term debt (despite a paucity of credit worthy borrowers), pending a more profitable disposition of their legal lending capacity.

    But since the Tressury didn’t collaborate with the Fed, there was a lack of tinder (repeating the Great-Depression’s error), and an inverted yield curve (policy rate), emasculated its “open market power”.

    I.e., Gov’ts weren’t acceptable collateral for the FRB-NY’s “trading desk” until 1933 (when the 12 RBs became a single central bank), the Presidents ran on balanced budget platforms, and estimates by the Department of Commerce put the net debt figure at the end of 1939 @ $183.2 billion compared with a figure of $190.9 billion at the end of 1929. I.e., for the period encompassing the Great Depression there was no over all debt expansion (no “grist for the mill”).

  66. Gravatar of ssumner ssumner
    25. March 2015 at 18:15

    Charlie, Sorry for the insult but this is a perfect example of why I don’t want you commenting here:

    “Too many people still believe that banks ‘lend out reserves’, or that banks ‘lend out deposits’ or that the money multiplier exists.”

    First of all it’s a moronic claim. But I have no problem with that. What I have a problem with is people who post over and over again, and completely ignore everything I say in response. Even Ray is far better than you on that score. He tries to respond, although he doesn’t know enough economics to know how. But you just ignore everything, repeating the same nonsense 10 times a day. Know one here cares what you think, you don’t respond when we point out why your claims are nonsense, rather you simply repeat them over and over again, clogging up the comment section.

    If you want to go through life playing the jerk like MF, that’s up to you.

    BTW, in case you still don’t know, the money multiplier is the ratio of M2/MB. How can a ratio “not exist?” I’ve pointed this out a dozen times, as I have the idiocy of saying banks don’t lend out reserves. It’s a simultaneous system!!! It’s not just wrong to say banks don’t lend out reserves, it’s moronic. But you keep saying this. If you don’t think it’s a simultaneous system, you’ve never told us why. You just keep saying “banks don’t lend out reserves” like a drone who once read a nutty heterodox monetary website, and was impressed by their “analysis.”

    Go away.

  67. Gravatar of flow5 flow5
    25. March 2015 at 18:27

    “the money multiplier is the ratio of M2/MB”

    The expansion coefficient is commercial bank credit divided by required reserves (but you can’t find figures for S&Ls and MSBs separately).


    Quantitative Easing and Money Growth:
    Potential for Higher Inflation?
    Daniel L. Thornton (since retired)

  68. Gravatar of CA CA
    25. March 2015 at 18:37

    Scott, I think closing comments here at The Money Illusion is a good idea. It’s become polluted with trolls and cranks. The level of discourse is not what it once was. I do think you should continue to respond to comments over at Econ Log though, as they moderate the comments over there.

  69. Gravatar of flow5 flow5
    25. March 2015 at 18:38

    Remunerating reserves is the kicker. Turns “specials” into impaired (circumscribed) earning assets.

    The differentiating question ostensibly illustrating the pseudo-economic reasoning of the last 57 years is: How is the growth of bank held savings explained on the consolidated balance sheet of the Federal Reserve System? The answer is that it cannot be explained in the consolidated balance sheet because monetary savings, from the standpoint of the banking system is a function of velocity or rate of turnover of deposits, it is not a function of the volume of its deposits.

    The growth of bank held savings thus results in no alteration in the “footings” of the consolidate balance sheet. Time-deposit growth signifies a transfer from demand deposits in the same institution (or some member bank), a bottling-up of existing money.

    And as long as monetary savings are held in the commercial banks either in the form of demand or time deposits the rate of turnover of those deposit is zero. They are lost to investment, indeed to any type of consumption or expenditure, until their owners choose to utilize them.

    In Keynesian nation-income accounting procedures savings = investment providing there are no offsetting government surpluses or deficits. By definition, this rules out all unspent savings.

    This is a world where pundits universally posit the belief that the commercial banking System is chiefly a conduit thru which the savings of the public are pooled in order to finance investment activity, i.e., there are no major leakages.

    The long-standing fall out is in plain sight. E.g., MSB’s balances in the MCBs were designated as interbank demand deposits (IBDD’s or balances maintained by customer banks in correspond banks), presumably because MSBs were called banks and were insured by the FDIC and not the FSLIC (and not counted in M1). At the same time S&L’s deposits were insured by the FSLIC and their balances in the MCBs were not designated as IBDDs (were counted in M1); neither institution had the right to hold deposits transferable by check on demand, without notice, and without income penalty (the legal basis for becoming a MCB), prior to the DIDMCA; both were the customers of the MCBs; and neither had Reg. Q restrictions prior to 1965.

    But then the DICMCA provided the legal framework to turn these 38,000 financial intermediaries into 38,000 commercial banks (now unidentifiable on the Z.1 release).

  70. Gravatar of flow5 flow5
    25. March 2015 at 18:41

    Close the comments. What I know sells itself.

  71. Gravatar of Student Student
    25. March 2015 at 19:08

    Liberal echo chamber is all I read? I mean I am commenting on your blog after all.

    I read all kinds of stuff. With respect to economics blogs: from marginal revolution, mankiw (although he doesn’t blog much anymore and he is a lame comment disabler), and taylor, to worthwhile canadian intiative, krugman, and brad Delong. Pretty balanced actually.

    I guess I am saying, good luck influencing national policy that dramatically without convincing politicians (and hence their constituencies).

    The problem with conservatives is they went all in on evangelicals, old timers, gold buggers, and conspiracy theory types. Look at your average fox viewer compared to your average john stewart viewer. to say their are equally open to evidence is nuts. You want to build that kind of base, then you suffer the consequences. One of which is an aversion to evidence.

  72. Gravatar of Student Student
    25. March 2015 at 19:14

    I must say, the comments have seen an increase in troll activity, although you also have several really sharp regulars as well.

    Also, one of the most entertaining things about your blog is watching you skewer trolls on a daily basis.

  73. Gravatar of flow5 flow5
    25. March 2015 at 22:55

    See: “The Federal Reserve Plans To Identify “Key Bloggers” And Monitor Billions Of Conversations About The Fed On Facebook, Twitter, Forums And Blogs”

    The Fed censored its research staff too.

    “skewer trolls on a daily basis”

    How so? Sumner already confessed, doesn’t know what money is.

  74. Gravatar of Student Student
    26. March 2015 at 04:38


    1.) it’s obvious your the same person posting under different names. That’s pathetic.
    2.) yes skewers. You don’t see it because you are the type that doesn’t look at evidence. Your comments make little sense and are filled with many words that don’t say anything. I can’t even finishing reading rhe majority of them because they literally kill brain cells.
    3.) you are so ignorant, you don’t even realize you have no clue what you are talking about.
    4,) I often disagree with sumner, but his toe nail contains a better understanding of money than all three of your personas combined.

  75. Gravatar of Charlie Jamieson Charlie Jamieson
    26. March 2015 at 06:09

    Scott, the recent paper, ‘Money Creation in the Modern Economy’ by the Bank of England describes the system, imo.
    And once we understand the reality of the system, then we can argue about policy.

  76. Gravatar of flow5 flow5
    26. March 2015 at 06:37


    “you are so ignorant, you don’t even realize you have no clue what you are talking about”

    Right, so lucky that I’m the best market timer in all of history.

    [Proximo] “I wasn’t the best because I killed quickly. I was the best because the crowd loved me. Win the crowd and you’ll win your freedom.”

    [Maximus] “I will win the crowd. I will give them something they never seen before.”

    [Proximo]: So Spaniard, we shall go to Rome together and have bloody adventures. And the great whore will suckle us until we are fat and happy and can suckle no more. And then, when enough men have died, perhaps you will have your freedom

  77. Gravatar of ssumner ssumner
    26. March 2015 at 09:46

    CA, Like the family that had the crazy uncle who thought he was a chicken said, when they refused to have him institutionalized. We need the eggs.

    Student, You said:

    I guess I am saying, good luck influencing national policy that dramatically without convincing politicians (and hence their constituencies).”

    Were “politicians” the reason the Fed adopted a 2% inflation target around 1990?

  78. Gravatar of Major.Freedom Major.Freedom
    26. March 2015 at 15:25


    “I know you are but what am I,
    As usual, pathetic.”

    No, it is not such childish games, even if they are in your head. What I was referring to is the fact that the assertion Sumner made about his critics “literally having no argument”, if we are to utilize the same premises to conclude such a thing, which is ignorance at best, and dishonesty at worst, then if Sumner wants to degrade the discourse to that level, then he should have no problems with critics of his ideas making the exact same ignorant assertion about his beliefs.

    And I don’t understand what you mean by “as usual”. You haven’t shown anything I said to be “pathetic” a first time, so it makes no sense to say that.

    “Market monetarists say least care about the unemployed unlike “rightie tighties” (thanks ben cole) who I can only conclude must enjoy watching workers suffer based on absurd “mis-allocation” disproven nonsense.”

    You are either ignorant or being dishonest with that statement. You are completely clueless if you actually believe you can convince me or any free market advocate that it is you socialists in money that have the moral high ground about caring about unemployment.

    WE care more about unemployment than you do, because we have what you don’t have, which is knowledge about how to actually help with widespread unemployment. You don’t seem to want to accept the harsh truth that it is precisely the Fed that with its loose money, inevitably creates widespread unemployment when the malinvestments are realized, either sooner through Fed abstaining from continued acceleration in inflation of the money supply, or later through continued acceleration and physical reality constraints manifesting itself through an inability of further inflation to “work” and coupled with central banker flippancy possible obstinacy towards hyperinflation.

    You don’t have the requisite knowledge to be able to lay claim that you are on one side of the fence of “caring” whereas free market advocates are on the other side.

    You have a false theory of inflation. The fact that you believe free market theorists can only be uncaring and cold shouldered for wanting what they do, proves that you believe inflation gives society a free lunch (when it follows your socialist plan). After all, who would refuse people a free lunch right? They must be anti-social curmudgeons, or as benjamin cole immaturely put it, and as expected you parrot it to me like a good tribal warrior, “righty tighties”.

    “On other issues, market monetarist a are more libertarian than traditional Keynesians. They are pragmatists who would rather have three quarters of a loaf of bread rather than nothing at all. (We witnessed the absurdity of the all or nothing crowd when the house tried to abolish Obamacare what, 43 times? Despite knowing it would never pass the senate)”

    Pragmatism is just a euphemism for statism. Phrases that are associated with violence against innocent people tend to have to be rephrased as the old words begin to carry a linguistic pejorative. You call it pragmatism because you know that statism, which it is, is not socially acceptable to enough people for you to get what you want.

    It’s not torture, it’s enhanced interrogation. It’s not statism, it’s pragmatism.

    “The great weakness of the right has always been tight money, which usually after being implemented by the Crypto-Austrian right
    Has elected leftists to power.”

    You are again either ignorant or dishonest with that claim. Austro-libertarians want neither tight nor loose money according to some absolute arbitrary ideal cooked up out of the socialist sinkhole of logic and rationality. They want a free market in money.

    “Or much, much worse, as is the case with chancellor Bruëning in Germany.”

    You mean after the hyperinflation made deflation necessary to prevent total economic chaos? Oh yes, do tell me more about how symptoms of a problem are now the start of sensible analysis and where we must turn a purposeful blind eye to not only what happened prior, but to all the other necessary factors that led to fascism in Germany. You’re just as uninformed as Sumner. Fascism arose in Germany and Italy for specific reasons, and deflation, while a factor, was not a sufficient factor. As I mentioned already on previous blogposts where this claim is made, if it weren’t for the fascist philosophical movement during the 19th century, which is closer to your ethics than mine, the Treaty of Versailles, which is closer to your ethics than mine, the internal political turmoil surrounding unification, which is closer to your ethics than mine, and yes deflation, which is still closer to your ethics than mine because massive deflation occurs because of prior massive inflation, all of these factors led to fascism in Germany. Your intellectual ancestors, not mine, were responsible for the deaths of 12 million people at the hands of the Nazis.

    Your mind is totally warped into the illusion that massive deflation is somehow a common free market problem. You seem to have little knowledge that the large and massive swings in inflation and deflation, and the business cycle, began when states started to monopolize money. There are no records of such swings before the rise of modern states. Even the “tulip bubble” was not an economic business cycle. It was an industry bubble brought about by a rare instance of a large scale influx, much of it stolen, of gold from the old world into the Netherlands.

    Tight money is associated with your ideal. You can pretend to believe that central banks printing money so as to target NGDP is removing money tightness, but you would be incredibly mistaken. It is as all socialist plans a temporary bandaid. Malinvestments don’t go away simply because the plan is for total spending to keep growing.

    The problems from 2008 did not go away. The economy is worse than it was than prior to then. Don’t make me laugh by claiming “unemployment” is lower and “output” is higher. Anyone who has taken a serious look at such data changes as labor force participation, the number of people dependent on the taxpayer, will not be fooled into believing that things are good because unemnployment is down, output is up, and NGDP is stable. Crude aggregate thinking is poison to the mind of a real economist.

    Sumner calls me a jerk? At least I don’t advocate for threats and uses of violence against innocent people under the veil of pragmatism. Truth hurts, but I got thicker skin. I don’t need to name call. I have better knowledge on my side.

  79. Gravatar of Student Student
    27. March 2015 at 05:33

    “Were “politicians” the reason the Fed adopted a 2% inflation target around 1990?”

    No, indeed they were not, fair enough.

  80. Gravatar of Student Student
    27. March 2015 at 05:40

    “Right, so lucky that I’m the best market timer in all of history.”

    If you are timing the market, you are either: using illegal inside information, you are very lucky, or you are completely delusional.

    However, your self described status as history’s all time best market timer reveals which one is most likely.

  81. Gravatar of Vivian Darkbloom Vivian Darkbloom
    27. March 2015 at 06:20

    “Were “politicians” the reason the Fed adopted a 2% inflation target around 1990?”

    Certainly, politicians were not the reason the Fed adopted a 2 percent inflation target; however, the 1990 date seems a bit premature here. New Zealand was the first country to formally announce an inflation target of 2 percent (in 1990). Several countries followed, but the US was a bit late to the game. By most standard definitions an “inflation target” would mean that the target is *explicitly* stated (would we say the Fed has an NGDP “target” of 4 percent today?) It is not likely the Fed even had an implicit target until the late 1990’s and it was not until 2012 that under Bernanke the explicit inflation target of 2 percent was announced. Mankiw speculates in his 2011 textbook that the Fed might have an implicit 2 percent target and raises the question whether it should be made explicit. It is quite arguable the Fed was moving toward “price stability” in a very loose sense from the early 1990’s; however, this does not an inflation “target” make (much less one of 2 percent). If one believes that expectations management is important, then the definition of “target” as explicit is crucial.

  82. Gravatar of ssumner ssumner
    27. March 2015 at 06:54

    Vivian, You are right about the explicit target, but I never said “explicit target.” The Fed has been talking about 2% inflation as a policy goal for many decades, as I’m sure you know. That was a goal they chose, it was not forced on them by politicians. That was my point.

  83. Gravatar of Vivian Darkbloom Vivian Darkbloom
    27. March 2015 at 07:02


    In the original comment, you indicated they “adopted a 2 percent inflation target around 1990”. I know you did not use the term “explicit”; however, I seriously doubt that in (or “around”) 1990 the Fed “adopted”, explicitly or implicitly, a 2 percent inflation target. Talking about something and adopting it are two different things, surely. Can you point to some source that indicates that about 1990 the Fed implicitly adopted a 2 percent target?

  84. Gravatar of Student Student
    27. March 2015 at 07:28

    Scott’s point was that fed policy changed without the force of politicians. Whether or not it was 1990 or some other year is sort of a minor quibble. I am not disagreeing with you, its just that either way, I think is point stands.

    What I am saying, however, is that I am not sure the Fed could switch to NGDPT without adequate support from politicians. Would amendments to the Federal Reserve Act be needed? Certainly, adequate support would be needed from the Senate to confirm a Chairman that would be willing to do something like that, right?

    Look, I am saying, changing to NGDPT is a big change (particularly using a futures market). I don’t it happening without politicians being involved.

  85. Gravatar of TallDave TallDave
    27. March 2015 at 09:16

    As a result, I don’t think that is a silly comment at all and I think that’s why you are going to have an uphill battle convincing conservatives using powerful arguments and evidence. They simply don’t care as much about evidence as other groups.

    Evolution has approximately zero effect on public policy. Meanwhile, the left is happily promoting all sorts of policies that are not grounded in evidence, such as forcing everyone to pay for acupuncture, banning GMOs, gun control, etc. And the largest concentrations of unvaccinated children — a very serious public health risk — tend to be in liberal enclaves in California.

    It’s usually easier to persuade a conservative with evidence, because conservatives, even when they’re wrong, usually at least believe in the concept of rigorous evidence as it relates to public policy. The left is mainly driven by emotional arguments, most often relating to “unfairness” of some sort, and tend to believe evidence is something to be manufactured to justify their emotions.

    Moreover, the right doesn’t have the gigantic blind spot about their own irrationality that people on the left tend to have, because the mainstream press isn’t dominated by rightwingers who look askance at their beliefs.

  86. Gravatar of TallDave TallDave
    27. March 2015 at 09:24

    Were “politicians” the reason the Fed adopted a 2% inflation target around 1990?

    Honestly, it’s a struggle to get politicians on the right to even understand why fiat money is better than a gold standard. They’re so much more worried about a Weimar/Zimbabwe-style hyperinflation driven by social spending that you have to start reciting all the Panics of the 1800s to even get their attention. I imagine the Fed governors just roll their eyes at the likes of Rand Paul. Still, it’s one of those issues like gay marriage or marijuana where the obviousness of the truth will gradually win them over, even though the left is ahead of them.

  87. Gravatar of ssumner ssumner
    28. March 2015 at 05:52

    Vivian, They’ve cited the 2% figure for many, many years, but I don’t recall whether the first time they cited that goal was 1990. Perhaps someone can check.

    That’s what commenters are for. 🙂

    Student, No legislation is needed, as NGDPLT is actually much more consistent with the Fed’s legal (dual) mandate than inflation targeting.

  88. Gravatar of ssumner ssumner
    28. March 2015 at 18:24

    Vivian, FWIW, DeLong says mid-1990s:

  89. Gravatar of Dan W. Dan W.
    28. March 2015 at 19:57


    What do you think Delong means by “nominal wage growth”?

  90. Gravatar of TallDave TallDave
    28. March 2015 at 20:17

    Charlie — this might help.

  91. Gravatar of TallDave TallDave
    28. March 2015 at 20:23

    (That really is a great wiki, btw.)

  92. Gravatar of ssumner ssumner
    29. March 2015 at 09:45

    Dan, Percentage change in average nominal hourly earnings (perhaps including benefits.)

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