We have a super duper awesome conference this weekend here at the Free Market Institute, so I have to be brief. Let me first motivate this post by issuing the following statement, to which I want you to react:
*** Ten-year bond yields have plummeted to 1.83%, from about 2.2% when the Fed “raised” interest rates in December. I hope all the Market Monetarists whining about the Fed’s “target rate being above the natural rate” are pleased to have gotten your way. ***
Let that sink in for a moment. I’m guessing any Market Monetarist fan reading this post will now be sure–in case there was any doubt before–that I am either (a) an idiot, (b) an intellectually dishonest scoundrel, or (c) both. If you think about the above statement, you’ll realize that there are at least three things wrong/unfair about it, and that I would have no business leveling that against Market Monetarists.
The reason I bring this up is that in reality, here is what Scott Sumner recently wrote on his blog:
“Or how about 10-year bond yields plummeting to 1.83%, from about 2.2% when they “raised” interest rates in December. I hope all you Austrians who whined about “artificially low rates” being set by the Fed are pleased to have gotten your way.”
Now on to something far more substantive. Look at how Scott–one of the world’s leading free market experts on monetary policy–thinks about this stuff: “In a better world the risk of recession and the risk of the economy overheating would always be evenly balanced. And I mean always, every single day of the year.”
And there you have it. When people in the comments refer to Scott as a Keynesian, this is what they mean. This is straight up crude demand management. We don’t need to know about relative prices or capital structure. There is a tradeoff between unemployment and (price) inflation and it’s the Fed’s job to turn the dial one way or the other to coast through the sweet spot.
Against that perspective, consider Hayek from his Nobel address:
The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.
P.S. I realize Scott was just venting on this particular blog post, such that he devolved into jokes about the NBA. Take my remarks above in the same light-hearted spirit.