An Analogy for My Views on the Significance of the Monetary Base
I’m not going to name names, but there are some people out there whose views on the monetary base and inflation at first seem quite opposed to my own, but in reality we are focusing on different levels of causality.
Specifically, it is true that the monetary base per se doesn’t make the price of milk go up at the grocery store. (Well, even that’s not technically true once you take account expectations and the effects of bankruptcies among investment banks, but bear with me.) However, those of us who are very worried about the unprecedented excess reserves are saying that the only plausible outcome of all this is a rapid rise in the money stock held by the public, commonly measured by the aggregates M1 and M2.
For an analogy–which of course is unfair but it gets my point across–imagine that you’re trapped in a bank with some robbers, and you’ve been moved into a back room with a big burly guy who’s guarding you. He pulls out a pistol and you say, “Uh oh, that’s not good. I don’t like him having that pistol.”
But then you notice that it’s not loaded. “Well, even though I’d prefer that he didn’t have that thing at all, right now we’re not in any immediate danger,” you reassure the others.
Then the burly guy pulls out some bullets and begins loading it. With each new bullet you say, “Oh boy, this isn’t good. He can really do some damage now. Maybe we should cause a distraction and then try to overwhelm him with paper cuts from these deposit slips.”
At this point a contrarian in the group says, “Would you idiots stop listening to this fearmonger? There’s nothing at all dangerous about a loaded gun. Look, he’s got six bullets loaded now, more than he’s had in the entire time we’ve been his captives. Are you in physical pain? Are you bleeding? I rest my case. You guys are clueless if you’re getting worked up over something irrelevant like the number of bullets in the gun.”
Then the guy starts firing, and people start dropping. You say, “I told you we were in trouble!”
The contrarian starts laughing. “Um, you dolt, haven’t you noticed that the number of bullets in the gun is dropping?! And you have a PhD in firearms?!”
