Saturday, September 19, 2015
Holden Caulfield sighs again
Timothy Taylor at The Conversable Economist reproduces the above graph from Yale's Nobel Prize winning economist Robert Shiller. Along with two analyses of what is seen there. One from the Obama Council of Economic Advisers and another from the Bank of International Settlements (members of which being the world's central banks, such as the Fed, Bank of England, and ECB).
We first note that the area to the right of Great Inflation Era (gray) that Shiller has labeled Modern Inflation Stability Era, we like to call The Age of (Milton) Friedman. Which is largely the result of that great economist's relentless drive to establish the idea that inflation is, always and everywhere, a monetary phenomenon. Which was an idea out of vogue during the Error of Keynes (pun intended), when it was fashionable to say that money didn't matter (much) for inflation. The latter belief originally heard by us in the Fall of 1966 when we opened our first Econ textbook.
That was the battle of language that Friedman won. Unfortunately, reading the excerpts Taylor provides in his blogpost from the CEA and BIS, reinforces our belief that the economics profession still doesn't understand the other key idea behind Friedman's monetary theory; interest rates are not...NOT...the price(s) of money.
From the BIS report; "As monetary policy in the core economies has pressed down hard on the accelerator....
The italicized line above is circular reasoning. Assuming one's conclusion: Interest rates that are low are a sign of easy--accelerator--money. Ignoring Friedman's oft stated dictum that low interest rates are just as likely to be a consequence of tight (or decelerating) monetary policy. As in 1930's USA, and as in Japan from the early 1990s to just recently.
The BIS continues with, The system’s bias towards easing and expansion in the short term.... That is again, circularity in logic. No wonder many of the world's economies can't 'gain traction', when many of the most prestigious economic/financial institutions can't even think coherently about interest rates. Nor monetary policy. Which are two different things.
As we've, on many occasions, had to remark. For instance, just recently.
Update: Scott Sumner has the same idea at Econlog.