22 Sep 2012

Nick Rowe Is Going to Excommunicate Me

Economics, Federal Reserve, Inflation, Krugman, Market Monetarism 68 Comments

Wow. I have been immersing myself in the monetary economics blogosphere discussions, and I don’t likes what I sees. In this post I’ll talk about Nick Rowe, whom you may recall I previously dubbed a kung fu master.

As with Scott Sumner, so too with Nick: I want to preface this post by saying he’s a funny guy, very smart, and a good economist. But when it comes to monetary policy, it’s not merely that I disagree with him, it’s that I am shocked by the words coming out of his keyboard.

In light of QE3, Nick was relieved that the tide had turned and put up a post saying, “We’re winning.” To show how much better things were now, Nick linked his readers to a post he had made in May 2010. It is this older post from which I want to quote, because it really should terrify the average Joe. So here’s Nick Rowe from a little more than two years ago, lamenting the state of the macroeconomics profession:

I think we are witnessing the biggest silent shift in macroeconomic thought since the Second World War. For 70 years we have taught, and believed, that we would never again need to suffer a persistent shortage of demand. We promised ourselves the 1930’s were behind us. We knew how to increase demand, and would do it if we needed to.

The orthodox have lost faith in that promise; only the heterodox still believe it. And the heterodox have nothing in common, except for keeping the faith.

The orthodox haven’t lost hope. They hope that monetary and fiscal policy will be enough to get us out of this recession, and that the limits on monetary and fiscal policy will not be binding this time around. And they are probably right. But they have lost faith that monetary and/or fiscal policy will always be enough – that there are no limits.

And if the Eurozone too turns Japanese, they may start to lose even that hope.

There are two types of macroeconomist.

The first says “What do you mean you can’t increase aggregate demand? You run out of paper? Ink? You scared of inflation?”

The second says “But monetary policy won’t work at the zero lower bound. And there are limits on fiscal policy, because we daren’t let the national debt get too big.”

Scott Sumner and Modern Monetary Theorists are examples of the first type of macroeconomist. They have nothing in common, except that one thing. But that one thing is more important than all their differences. And they are heterodox.

Traditional Keynesians and monetarists, the competing schools of the old orthodoxy, belonged to the first type of macroeconomist. They differed only on tactics. They kept the faith. But they have now gone, and only monetary cranks sing the old religion.

The second type of macroeconomist represents the new orthodoxy. Few orthodox macroeconomists today will admit point-blank to having lost the faith, any more than a bishop, no matter how liberal, will admit to being an atheist. But if you believe that monetary policy is ineffective at the zero bound, and that there are limits to how long you can have a big fiscal deficit, it comes to the same thing. You have lost faith that you can always and everywhere increase demand by whatever it takes for as long as is needed.

Losing faith in monetary and fiscal policy, the orthodox turn to financial policy. “If we had better regulation and/or supervision of financial markets and institutions, we wouldn’t have gotten into this mess in the first place”. That’s probably true, but it’s also a distraction from the loss of faith. Financial markets and institutions are inherently unstable. They borrow short and lend long; they borrow safe and lend risky; they borrow liquid and lend illiquid; they borrow simple and they lend complex. Finance is magic; you know it can’t really be done. Regulation and supervision can never eliminate financial instability. If your faith is contingent on being able to prevent financial crises, you have lost the faith.

Good financial regulation and supervision are important in their own right. A good financial system will better serve the interests of borrowers and lenders. It will create benefits on the supply side. And financial crises will almost certainly cause demand to fall. But just because something causes demand to fall doesn’t mean monetary and fiscal policy can’t work. The whole point of Keynesian policy was that when (not if) something did cause demand to fall, monetary or fiscal policy could and should be used to increase it back again.

OK, and now that you’re warmed up, Nick follows the above with what must be one of the most unintentionally damning indictments of his whole worldview ever written:

Even suppose the financial system totally collapsed. Why should that prevent monetary and fiscal policy working to increase demand? The biggest flaw of orthodox macroeconomic models is that they have no financial sector. So, if the financial system disappeared, that ought to mean those models would work even better.

* * *

We’re kind of at the point where my commentary on the above is superfluous. If you read all that and are nodding your head saying, “Yes, yes, I like what you’ve done here, Nick,” then my criticism will seem crude and irrelevant to you. If, on the other hand, you’re reading that and thinking, “Wait a second. He doesn’t think there are limits to monetary and fiscal policy, even in principle? What exactly does he mean by that? And he’s using the fact that his models don’t have financial sectors as further evidence that we ought to be trusting them right now? Huh?!” then you don’t need me to spell out the problems here.

So instead of me criticizing Nick, let me be a nice guy and give my own explanation of what happened. In his latest post (which I link above but from which I’m not quoting), Nick is happy but baffled as to why his pessimism of May 2010 is now turned back to optimism. In other words, Nick can’t understand why so many of his peers lost the faith in the first two years of this crisis, but now they seem to have it back all of a sudden. Here’s my take:

==> Although there were a few Cassandras (including Nouriel Roubini from the interventionist side and Peter Schiff from the hard-money/deregulate side) who had very prescient descriptions of what was coming, generally speaking most economists had no idea just how bad things would be in 2008.

==> Even though most economists taught and published on the academic models that form the core of Nick’s religion (hey, I’m just continuing his metaphor), they didn’t believe it in their bones. They actually had common sense, and realized that this type of picture was scary:

The above picture isn’t the current one; it shows what the monetary base looked like, as of May 2010. So I’m saying I think most economists had common sense, looked at that chart, and thought, “You know, I just can’t agree with Scott Sumner that that is a picture of the tightest monetary policy since Herbert Hoover. I understand how back in the Depression, M1 and M2 actually fell sharply, and so did prices. But we’ve had rising Ms and CPI since the start of 2009. Sure, CPI growth hasn’t been high by historical standards, but we haven’t had outright deflation. And man, the Fed sure has pumped in a lot of base money. Maybe pushing harder on that particular lever isn’t really the answer. I’m not even sure running up more government debt will help, since we’ve had multiple years of trillion-dollar-plus deficits and that too doesn’t seem to be working very well.”

==> So why the turnaround? I think it’s because guys like Peter Schiff, Marc Faber, and (to a much lesser extent, since I’m not famous) me, were going nuts in 2009 warning everybody about Bernanke’s mad plan to debase the dollar. When our warnings didn’t come to pass, Krugman and Sumner (mostly Krugman) were running victory laps, saying “nana nana boo boo, we were right and the critics are idiots.”

==> Seeing that unprecedented money-creation didn’t seem to hurt, economists slowly got convinced to give it another try. In this effort, guys like Sumner were instrumental, because he relentlessly used very cogent arguments and data to show why everything made sense, from his perspective.

68 Responses to “Nick Rowe Is Going to Excommunicate Me”

  1. noiselull says:

    1. He agrees that there are limits. You are not reading Rowe closely. It (monetary/fiscal policy) is not limited with regard to the task of boosting aggregate demand (as Sumner says, we saw that in Zimbabwe).

    2. There was in fact outright deflation. (Though see Mankiw: http://gregmankiw.blogspot.com/2009/06/deflation.html )

    • Bob Murphy says:

      You’re not reading me closely, noiselull. I said we didn’t have falling CPI “since the start of 2009.” Mankiw’s chart shows yr/yr changes which is why it was still negative in early 2009.

      • Robert Fellner says:

        I love when RPM lays the smackdown, its so rare and thus all the more wonderful when he finally does!

        • Major_Freedom says:

          You must be new here.

          • Robert Fellner says:

            So direct and bluntly, is what I meant. Not that he doesn’t do it often.

            • Major_Freedom says:

              Rare, often, what’s the difference?

              • Robert Fellner says:

                I’d like to go ahead and remove all my comments and just say that I LOL’d at his “you’re not reading me closely noiselull” line, and thought that was (appropriately) a bit snakier than what I’ve come to expect from Bob.

              • Robert Fellner says:


              • Major_Freedom says:

                I for one enjoyed your comments.

  2. marris says:

    Does anyone know *what research* this article is referring to?

    Also, recent research indicates “much of what’s going on with the unemployment rate is not structural,” suggesting that the Fed has more room to bolster growth without stoking inflation, [Kocherlakota] said.

    Kocherlakota said he would have voted in favor of the FOMC’s decision to roll out a new round of stimulus last week, His policy proposal would help “enhance” the effects of the current easing measures in place, he said.


    Linked from Scott Sumner


  3. Tel says:

    The biggest silent shift in macroeconomic thought is that the public are losing faith in economists.

    Once upon a time economists talked about “confidence” as if it was important, now they just bat away the little confidence fairy, “What’s she gonna do huh?” Then her half-brother the insecurity ogre turned up, and the statist figured they could use the insecurity ogre to bash the population into obedience, and indeed outwardly they are obedient, but inwardly they are no longer interested in participating, and that’s where thing will sit.

    Even suppose the financial system totally collapsed. Why should that prevent monetary and fiscal policy working to increase demand?

    That depends, it would probably increase the demand for scalps and scapegoats. Can you buy options on those?

  4. Jonathan M.F. Catalán says:

    You might be right in part, but I think you neglect some very early activism for a different kind of monetary policy. The kind of monetary expansion that Krugman advocated for early in the recession was much more than what Bernanke committed to. In a 2010 article, I cite Krugman as arguing in favor of a $10 trillion liquidity injection as a means of shifting inflation expectations. I don’t know when exactly Krugman realized that in his paradigm the U.S. resembles Japan, but his work on Japan has been emphasizing this kind of “unconventional” monetary policy for quite a while (and I recall him criticizing the Fed very early on). Whatever change in opinion did occur, I think a heavy influence was Richard Koo (and the rediscovery of Hyman Minsky) — he really brought a lot of people to emphasize that this is a deeper recession that most realize.

  5. Gene Callahan says:

    “And he’s using the fact that his models don’t have financial sectors as further evidence that we ought to be trusting them right now? Huh?!”

    That’s not what he said.

    • Bob Murphy says:

      It’s close, and anyway I’m speaking for Joe Sixpack. What Nick is actually saying there would (correctly) horrify Joe Sixpack.

  6. Mike Sax says:

    Bob, I got to be honest with you: I’m in the “Yes, yes, I like what you’ve done here, Nick,” camp. As far as simple interpretation goes I don’t think he was praising his own model for not having the financial sector in it but was talking about the models of the “mainstream economists.”

    “When our warnings didn’t come to pass, Krugman and Sumner (mostly Krugman) were running victory laps, saying “nana nana boo boo, we were right and the critics are idiots.”

    Still, how is this an unreasonable reaction? Actually the guys who looke worst were the guys who put their money where their mouth is in predicting a popping of a “treasury bubble” any day now.

    Jim Rogers and Bill Gross weren’t hypocrites, They went for it. That was kind of funny-Gross now admits he was wrong. Rogers though has been talking about doubling down.

    So has the expanded monetary base hasn’t led to galloping inflation, stagflation, or bond vigilantes throwing away our debt, what exactly is the danger as you see it?

  7. skylien says:

    “The biggest flaw of orthodox macroeconomic models is that they have no financial sector”

    OMG. I am horrified!

    Isn’t that like programming a flight Simulator without including gravity? Ya, in such a model there would never be a problem that couldn’t be handled, and planes would never crash as long as pilots wouldn’t steer intentionally into the ground…

  8. Major_Freedom says:

    Neither Rowe, Sumner, nor any other inflationist “believer” seem to understand why there would suddenly arise a widespread rise in the demand for money such that AD falls, as what occurred during 2008-2009. No doubt, various causes are proposed, however none of them consider previous inflation and it’s effect on the real structure of the economy. It’s unfortunate.

  9. Major_Freedom says:

    Nick Rowe:

    “Financial markets and institutions are inherently unstable.”

    Financial markets? Where? Is this comment based on empirical evidence that does not exist? Is it really just another example of prejudicial anti-capitalism that seeks to present state monopolized money production as the only solution to our economic woes?

    “They borrow short and lend long; they borrow safe and lend risky; they borrow liquid and lend illiquid; they borrow simple and they lend complex. Finance is magic; you know it can’t really be done.”

    Monopoly over money production generates inherent instability. It borrows long and lends short; it borrows risky and lends safe; it borrows illiquid and lends liquid; it borrows complex and lends simple. Fiat money is magic; you know it can’t really be done.

    Where is the investigation on the source of borrowing safe, the liquid, and the simple? Are we just supposed to ignore the Fed in this respect, and only consider them controller of AD?

  10. Bill Woolsey says:

    I am pretty sure that Nick Rowe is of the view that generating enough spending on output is never a problem because a sufficient increase in the quantity of money will generate the amount of spending desired. Further, by creating less (or destroying) money, any probem of excess spending on output can be avoided.

    However, Rowe does not argue that more spending on output solves every problem. However, most of the arguments about finanical instability is that these problems (too much debt, an inability of banks to lend, what have you,) lead to too little spending. Rowe is arguing that the old orthodoxy was that this can be solved by monetary policy (his current view) or fiscal policy (the Keynesians.) And he now believes that the “orthodox” view is moving back to the previous view that monetary and fiscal policy is effective. The most recent changes involve monetary policy.

    • Major_Freedom says:

      “Further, by creating less (or destroying) money, any probem of excess spending on output can be avoided.”

      This is not universally the case. It is possible, and I will argue is getting more and more likely over time, for the Fed to have created so much money during a period of growing demand for money, that a sudden reversal in the demand for money could generate so much nominal demand that the Fed is incapable of containing it through asset sales, due to the fact that the Fed’s balance sheet is insufficient. I mean, the Fed’s balance sheet is accumulating more and more junk assets, so it is not like the accounting value the Fed assigns to those asses will come even close to fetching that market value in the open market.

      It is one thing for the Fed to create money and add whatever it wants to the money supply, but it quite another for the Fed to reduce the money supply by whatever it wants. The former is necessarily possible, the latter is not.

      • Major_Freedom says:

        Assuming of course that the dollar remains money.

  11. Nick Rowe says:

    Hi Bob!

    I’m fighting one war with the Keynesians, another with “the people from the concrete steppes”, a third war with the Neo-Ricardians, and now the Austrians join in! Too many fronts at once!

    There are two questions:

    1. If we wanted to, could (US) monetary and/or fiscal policy increase demand (shift the demand curve(s) for newly-produced goods to the right)?

    2. If it did increase demand, would the result be an increase in real output and employment, or would it be only higher inflation?

    Suppose, just suppose, for the sake of argument, you didn’t care about the answer to the second question. What is the official Austrian answer to the first question? Does the Zero Lower Bound mean that it would be impossible to use monetary policy to turn the US into Zimbabwe, even if you wanted to?

    Don’t wimp out on me now Bob. I wanna hear it!

    (BTW, my “we’re winning!” was meant mostly ironically.)

    • Major_Freedom says:

      Since Bob is being invited to answer the first question, I will answer the second question.

      The second question contains a tacit false dichotomy in which the only outcome of inflation is either a rise in “output” and “employment” (plus some price inflation), or a rise in prices only.

      There is a outcome that is not being considered, and that is the question of the TYPE of “output” and “employment” derived from increased money inflation.   In other words, can the new “output” and “employment” trajectories be sustained by the new rate of money inflation, or do they require a continually changing rate, specifically anmaccelerating rate, of money inflation?

      What is the official “Nick Rowe position” on “output” and “employment”?  Is each “output” and “employment” scenario interchangeable with every other?  In other words, is every possible full output and full employment scenario as equally sustainable and “healthy” as every other?  Or is it possible for an economy with full employment and full output, as measured by aggregate statistical additions, to be structured in a physically unsustainable configuration such that he only way to prevent NGDP from falling in the future, or, in other words, the only way to offset a rise in the demand for money in the future, is a continually increasing rate of money inflation by the Fed, which of course has the logical outcome of infinite money inflation and breakdown of the currency?

      From what I have read of the inflation “believers” (<- not meant to be pejorative), it appears as though inflation, if it does lead to an increase in "output" and "employment", in some degree in some contexts, does nt distinguish between sustainable and unsustainable configurations.  It is as if every 5% increase in output or employment, is the same as every other 5% increase in output and employment, and that if we observe a percentage increase, then the "atheists" have no justification in critiquing the believers, because as long as output and employment increase, that's all that matters.

      Do you distinguish "output" and "employment" into, for lack of any better descriptions, ,"good" and "bad" output and employment?  Or are they all the same because they can all be measured in terms of singular percentage growths?

      • Nick Rowe says:

        MF: straw man.

        • Major_Freedom says:

          Questions cannot be straw men.

          • Major_Freedom says:

            Unless of course they are rhetorical, which none of my questions happen to be.

    • Jonathan M.F. Catalán says:

      Regarding (1), I think most Austrians will concede that fiscal and monetary policy can shift the AD curve to the right. But, these same Austrians would consider the shift meaningless on its own. What matters is the allocation of goods, with fiscal and monetary policy causing a misallocation or malinvestment of resources

  12. Jason says:

    Robert Wenzel is criticizing your article at Economic Policy Journal:

    • Bob Murphy says:

      For some reason I can’t see it. What’s the gist of it? Which article?

      • Nick Rowe says:

        This article (or rather, this blog post). The gist of it (in a very quick read) is that it’s not enough just to look at the monetary base.

        • Joseph Fetz says:

          Yeah, but the weird part is that Bob wasn’t really talking about economics, he was answering the question of why mainstream economists have a newfound “faith”. Of course, I agree with Wenzel as to why money supply didn’t grow and all, but that has nothing to do with what Bob is addressing. Sure, Bob showed an MB graph, but only to say something akin to, “this is what scared the shit our of many economists”, not for any economic analysis purposes.

  13. Nick Rowe says:

    Bob: ” He doesn’t think there are limits to monetary and fiscal policy, even in principle? What exactly does he mean by that?”

    I mean (if this makes it clearer) there are no limits to the amount of *nominal* demand that monetary and/or fiscal policy can create. Of course there are limits to the amount of *real* output they can create.

    Do you disagree?

    • Major_Freedom says:

      What about hyperinflation and ultimate rejection, i.e. demonetization, of a currency?

      Are you saying that the Fed could in principle create any nominal demand it wants, even 100 trillion % daily inflation, and the currency will always remain the universal medium of exchange?

      • Nick Rowe says:

        MF: red herring.

        • Major_Freedom says:

          It is directly related. You made the statement that there is no limit to the amount of nominal demand the Fed can create. Well, I am testing that conjecture because I don’t think it is correct.

          • Richard Moss says:

            Hyperinflation is an expression of limitless nominal demand.

            Nick clearly said that, despite being able to create such limitless nominal demand, real output is limited.

            I don’t see how this is inconsistent with a hyper-inflationary episode.

            • Major_Freedom says:

              The context is increasing aggregate demand to ANY quantity whatever, not hyperinflation per se.

              While inflation can reach 10%, 100%, 100 million % and so on, it cannot accelerate ad infinitum.

              I fully realize Rowe said real demand would be limited. I just add that inflation is also limited.

              Mathematical infinity is always constrained in economics to what is practically possible in action. Can we write down on paper that a currency is inflating at 100 trillion trillion % per second? Yes. Can humans act using such a currency in the real world? Probably not. If they could, then just consider an even faster rate that makes it practically impossible to economically calculate.

              • Major_Freedom says:

                In other words, “limitlessness” is not a concept actionable by man.

                Everythng about us is finite.

              • Richard Moss says:

                “The context is increasing aggregate demand to ANY quantity whatever, not hyperinflation per se.”

                It’s not clear to me that is what the context was. All Nick said was that there are no limits to the amount of nominal demand a monetary/fiscal stimulus can create.

              • Richard Moss says:


                Ok, I think I see what your getting at. Nominal demand can increase by 100%, 1000%, 10000%, 100000%, but not infinitely, so the nominal demand monetary/fiscal policy can generate is limited ?

                I am still with Nick: red herring.

              • Major_Freedom says:


                You say that the context is not clear to you, but then you go ahead and state the context to me.

                That statement, the “there is no limit to the nominal demand a monetary stimulus can create” is the context I am referring to, and the context that I am arguing is wrong, for the reasons given above.

              • Major_Freedom says:

                How in the world is my argument against the statement “there is no limit to nominal demand” a red herring?

                It’s on topic!

                I feel like I am living in the Twilight Zone.

              • Major_Freedom says:

                Can you not see the problem with holding the following two statements at the same time:

                1. Inflation cannot rise ad infinitum (you conceded this point)

                2. The Fed can increase AD ad infinitum (Rowe’s point)


              • Richard Moss says:


                Harping on the difference between a 100,000% increase in nominal demand vs an infinite one when under both real output is not affected is a red herring. It is a distraction from what matters – that there is limit to what policy can do to affect real output.

                Now, I would much rather argue whether monetary policy can do *anything* to ‘improve’ real output…

              • Major_Freedom says:

                It isn’t a red herring because the statement made by Rowe, to which I responded, was that there is no limit to monetary policy increasing AD.

                Real output is another issue from the one I was addressing.

                I am not “harping” on a tengential point so much as disputing the very important claim about unlimited AD.

                “What matters” is the specific statement I chose to respond to.

                Now, if you won’t to talk about whether or not monetary policy can do “anything” to affect real output, then we can have that discussion, but don’t think that I will agree to minimizing the importance of what I am saying just because you want to talk about something else.

              • Richard Moss says:


                You wrote;

                “Real output is another issue from the one I was addressing.”

                Right, and what real output is what matters. Why bust chops over whether nominal demand is increasing ad infinitum or or hits 100,000%+ when the currency goes bust if real output is not affected.

              • Major_Freedom says:

                You won’t get any arguments from me when you say real output is what matters.

                But you will get one if you say that real output won’t be affected with 100,000% inflation or currency collapse. Money is not neutral.

                The reason why I am “busting chops” is due to the nominal context that was presented by Rowe in his two questions, the first of which I answered because he invited Murphy to answer the second. The more appropriate question is why are you busting my chops for answering a question. Do all statements and all arguments have to be about real output only? I think you need to pick your battles.

    • Bob Murphy says:

      Nick, yes, I definitely disagree on the fiscal part. If the USG tries to borrow $20 trillion next week in order to boost AD, and if the Fed doesn’t buy any more Treasuries, then I think it “won’t work.” That was one part of your post–where you were pooh-poohing concern over the national debt–that astounded me.

      • Nick Rowe says:

        Pooh-poohing concern over the national debt, and its burden on future generations? Moi?!

        OK, so what about monetary policy? Suppose Major Freedman snuck into the Fed while nobody was watching, locked everyone else out, took control of monetary policy, and tried to debauch the currency so badly it would become worthless. Would he be able to do it, despite the ZLB?

        I say “yes” (unless he ran out of paper and ink). Many economists say “no”. What do you say?

        • Major_Freedom says:

          Wouldn’t “worthlessness” represent a limit to inflation, and hence a limit to a monetary authority’s ability to increase AD?

          For the US dollar, this limit is probably the highest compared to any other currency, as to its world reserve currency status (and is, IMO, partially responsible for why the Fed can inflate so much with somewhat subdued effect on domestic prices). But the inflation limit to lower valued currencies, like the old Zimbabwe dollar, is relatively lower. In this sense, lower valued currencies are sort of like consumer goods in high currency economies: Too many produced at it is relatively easier to hit worthless status.

          I find it highly dangerous and irresponsible for the Fed to take advantage of its world reserve currency status and target domestic NGDP with potentially high rates of money inflation that could lead to a reaction from the world of dumping the dollar.

          Considering how much of our standard of living is derived solely from the fact that the dollar is the world’s reserve currency – and it is a lot – which enables us to buy goods and services from abroad at virtually zero real cost to ourselves, a dumping of the dollar abroad would have devastating effects, even if American NGDP remained nominally stable.

          This is why I think it is extremely unwise to advocate for NGDP targeting in a blind, “no matter what” manner. It could come at the cost of us no longer being able to buy goods from abroad at virtually no cost.

          A strong argument can be made that the Fed should focus more on retaining its world reserve currency status, than domestic NGDP targeting. Maybe, and I suspect it is the main reason, the Fed is not looser than it is now because they are getting calls from China and Japan and Saudi Arabia. These treasury holders are probably on speed dial, whereas MMs are good for justifying continued Fed dominance when it serves the Fed’s self-interest.

        • Bob Murphy says:

          I say “yes.” You talked about a lot more than that one point in your post, Nick.

          • Nick Rowe says:

            Thanks Bob. That means we basically agree. A lot of people disagree, and say monetary policy can’t do anything at the ZLB.

            That was the only point of my post. I confess i don’t really understand your post.

            • Bob Murphy says:

              I’ll try to type up something more straightforward next week, Nick. (Not that you are obligated to respond to it.) You monetary guys obviously know your models and the various historical data more than I do, but if you don’t “get” what I was doing in this post, then I really think you are so used to talking to each other that you don’t realize what it sounds like to an outsider.

    • Bob Murphy says:

      Also Nick the part where you said “can and should.” It wasn’t clear if you were referring just to Keynesians or included yourself, but in context it looked like yourself.

      • Nick Rowe says:

        Both Bob. Nothing controversial there. If a drop in demand would cause an excess demand for money and a recession, we should stop that happening. I’m quite confident that even Major Freedom agrees with that. (Unless he thinks that might be a good way to get people using a different currency?)

        • Bob Murphy says:

          Your confidence is unwarranted, Dr. Rowe.

          • Nick Rowe says:

            That cannot be, Bob. I know that Major Freedom is really a kindhearted soul, deep down. I saw him help an old lady cross the street once. Admittedly, she didn’t actually want to cross the street. But it’s the thought that counts.

            • Major_Freedom says:

              I was helping her avoid the avalanche of paper bills with pictures of dead Presidents on them, that you sent to save her.

        • Major_Freedom says:

          If a drop in demand would cause an excess demand for money and a recession, we should stop that happening. I’m quite confident that even Major Freedom agrees with that.

          It is always interesting to me how when two people share different worldviews, that such brief and seemingly clear-cut statements presuppose so many premises and imply so many implications that need to be “unpacked”, as it were.

          Very briefly, I consider the Fed acting to inflate in order to prevent a non-Fed originated drop in AD to be akin to (borrowing your analogy) helping old ladies cross the street who don’t want to be helped across the street.

          The way you made your argument suggests that a drop in demand is a causal force that leads to an “excess” demand for money. The way I look at things however would suggest that the drop in nominal demand and the rise in demand for money are two sides of the same coin. They both occur simultaneously, because the one implies the other (assuming money is not being destroyed outright of course). The drop in demand that you observe IS an increase in the demand for money. That’s why demand drops. Demand drops because people are spending less than they used to, which is the same thing as holding more money than they used to.

          Now, there is a HUGE caveat to this point, and that is the issue of money created through fractional reserve banking. Due to the fact that a substantial quantity of money that circulates is derived from expansions of fiduciary claims to money, which nevertheless are used to trade as money, it is possible for AD to drop due to an outright reduction in the aggregate quantity of money, as fiduciary credit is defaulted on and paid back.

          Thus, to the extent that the supply of money falls in this way, which then reduces AD, I cannot say that the drop in demand is the exact same thing as a rise in the demand for money. But having said that, there is however a relationship between the decrease in the quantity of money through credit deflation and increases in the demand for money. The latter may trigger the former.

          I would also challenge your argument concerning “excess” demand for money on its own right. That is, I would reject any assertion on your part (or any other individual’s part, including my own, and the smartest person in the world), that can enable that person to be a knowledgeable judge of what constitutes “excessive” demand for money and what constitutes “non-excessive” demand for money. In my view, there is only the individual’s desire for cash.

          The word “excessive” implies that there is some “non-excessive” demand for money that you or someone else has knowledge of what cash balances millions of people OUGHT to hold, as opposed to the cash balances that millions of individuals actually PREFER to hold. I consider the latter to be the only reality, and the former to be dogmatism.

          What cash another desires to hold, including your demand for cash, can never be considered “excessive” from MY perspective, because the center of judging such things is the individual themselves, i.e. you with respect to your demand for cash, not some random individual, even one who has a PhD from a (e.g. Fed financed) university. Each individual has their own desires for cash that are separate from every other person’s desire for cash. You are in no position to judge my demand for cash as “excessive” or “non-excessive”, and I am in no position to judge your demand in those terms either.

          I would also like to make explicit that what you call “recession”, I call “correction”. I do not consider recessions to be times that the state should intervene, including more money inflation to “target NGDP”, whatever the case may be. This is because I consider such inflation that you consider to be the cure, to be the prior cause for why the demand for money and a drop in AD would suddenly arise in the first place. I do not consider AD to be independent of the market process such that the Fed is viewed as a proper controller of AD while the market is viewed as a proper controller of supply and prices, the product of which constitutes AD.

          I consider AD to be an integral part of the market process itself, not in the sense of what the height of AD happens to be (since the Fed controls that), but the relative demands the additions of which AD is composed (which the Fed indirectly affects by way of focusing on and controlling the aggregate).

          In other words, I do not hold AD to be a macro-economic concept that is divorced from the market process, such that the Fed is to control it, while the market process is to control the components of AD. I hold that when the Fed controls AD, it indirectly affects the components of AD in such a way that market actors are later on observed to suddenly reduce their spending and increase their demand for money, which you observe as a reduction in AD. I hold AD and AS to be intertwined, but not in the way you would hold, but rather in a way that has an individualistic common causal ground.

          I do not say something like “A decrease in AD will cause a contractionary movement along the AS curve”. I rather say “Individuals who reduce their spending are attempting to improve their situations, and they CAN improve their situations even if others are trying to do the same thing.” Yes, I argue that this improvement can be associated with a contraction in output and increase in unemployment. I view these events as part of the recovery. Recovery from what you might ask? From the unhealthy economic coordination prior, which appears to macro-economists as “growing output and employment.”

          I do hold that every increase in output and employment should be embraced. I do not treat every increase in the same way. Sometimes, output and employment are increased in an unhealthy fashion. Unhealthy from what standard? From the standard of what individual market actors actually want. Sometimes, what individual market actors actually want is not aligned with what the capital structure of the economy would nominally imply.

          I hold that a monopoly monetary authority that inflates according to non-market based rules (5% NGDP growth for example is a non-market based outcome. It is an outcome decided by non-market actors who are in coercive control of what is essentially a legalized counterfeiting operation), I hold that this introduces relative pricing and relative demand signals that bring about a systematic misalignment between individual market preferences and the capital structure.

          This is a brief summary of why I consider inflation being used as a tool to “prevent recessions” is destructive, contrary to what is needed for real recovery rather than superficial aggregate output and employment increases, and why it is a serious misunderstanding of money to believe that one is privy to knowledge of some objective demand for money below which is “deficient” and above which is “excessive”. I hold such a dichotomy to be the product of arrogating one’s own subjective preferences to the status of objectivity that is to overrule everyone else’s subjective preferences.

          • Major_Freedom says:


            “I do not hold that every increase in output and employment should be embraced.”

          • Matt Tanous says:

            That was incredibly long, but it made sense – more sense than the money guys, at least. Especially the bit about subjective preferences. I am still amazed that after all these years since Human Action and Man, Economy, and State, it is so difficult for economists to leave their personal value judgments at the door. I guess when you are paid by the State, it behooves you to figure out ways to implicitly suggest the State intervene…

            • Major_Freedom says:

              I am still amazed that after all these years since Human Action and Man, Economy, and State, it is so difficult for economists to leave their personal value judgments at the door.

              Heh, that’s funny because HA and MES were ALL ABOUT personal value judgments.

  14. Marc says:

    I’m with you MF, it was not a red herring.

    • Major_Freedom says:

      I suspect it is was labelled a red herring as more of an evasive maneuver than a sincere analysis.

      I mean, the only two replies I received are ” straw man” and “red herring”, as if there is a game I am not aware of where common argumentative fallacies are mentioned solely for rhetorical effect.

      • Rob says:

        False premises

        • Major_Freedom says:

          Case in point…

          • Dave says:

            Seems like his one phrase answers are implying the “fallacy fallacy”. The argument that if there is a fallacy contained in an argument, that argument is automatically wrong.

  15. Major_Freedom says:

    Murphy, can you do a detailed post on the shadow banking system? I think it dovetails nicely with the “who was right about price inflation” debate, and explains why the incredible rise in the monetary base did not lead to proportional price inflation. The shadow banking system has been collapsing/liquidating for years, and is counter-acting the Fed’s inflation.

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