Claims About Monetary Policy

Sometimes it seems that virtually all claims about monetary policy are either incoherent or wrong. Take for example the following comments from a recent Washington Post article about the Fed:

  1. “LOL
    The FED never got us out of any recession, it’s Still here. The FED caused the last recession, why on earth would it fix it. GDP is a sham as the numbers are very cooked. Unemployment numbers are cooked and well stirred. Inflation is at 8% and this is brought to you by FED / Global government in conjunction with Corrupt government overspending and a complicit PRESS who lies and misleads on a daily basis.”
  2. “Want to improve economic growth? Start with reeling in Big Pharma. A few Epipens cost Thousands of dollars that could be used to purchase goods and services throughout the whole economy instead of being used to enrich a handful of greedy execs.”

The first case is obviously incoherent. Ayer would call this “literal nonsense.” How must the commenter view the world for his view to be correct? GDP is a “sham” and the numbers are “very cooked”; of course if this is true we would expect the government (given broad latitude over GDP figures) to release more robust figures. Ditto for unemployment numbers. The entire last sentence is unfalsifiable/silly.

The second case is an example of just being plain wrong. The commenter is probably relying on some idea that consumption is an “important” component of aggregate demand and investment is a trivial component. The commenter’s theory is at least testable.

Obviously these comments are from laypeople unschooled in macroeconomic theory. I suppose we can forgive them, although I find that intellectually unsatisfying. At any rate, it’s more surprising when you see this from real economists.

John P. Hussman argues for the following view of monetary policy:


Remembering the Quantity Theory of Money (QTM):


Velocity is defined as Py (nominal GDP) over M (money supply).

The only way V could fall in direct proportion to the rise in M is if increasing M had no effect on nominal GDP (NGDP). In other words, we drop the classical advice that nominals only effect nominals and replace this with nominals only effect reals.  Hussman’s story is further complicated by the fact that markets actually react to increases in the monetary base as if they are expansionary (they are). If the announcement of an increase in the monetary base causes asset prices to rise, NGDP has increased.

Honestly, I’m not sure how Hussman’s graph was constructed. A graph of the size of the (indexed) monetary base versus M1 velocity is reproduced below:

fredgraph (3)

I think the “dogmatic monetarist” story looks more plausible.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s