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//MONETARISM The Chicago economist was a critic of the over-mighty state He was a passionate critic of public-school monopolies (which

remain as resistant to reform as ever). championed the legalisation of drugs and prostitution and the abolition of the draft. So what would he have wanted economic policymakers to do now? One part is obvious: unleash the deregulation the world needs. In A Monetary History of the United States, co-written with Anna Jacobson Schwartz, Friedman argued that the Federal Reserve was an accomplice in the Depression, thanks to its failure to reverse a stunning fall in the money supply. In the 1930s low interest rates were interpreted as a sign that monetary policy was loose. Friedman and Schwartz showed that inflation-adjusted interest rates were a better indicator and that money was in fact tight. When bank panics further shrank the money supply, the Feds refusal to respond made the Depression great. Monetarism holds that money-supply changes influence real economic variables such as employment in the short-run but only inflation over time Dangerous falls in money supply are the responsibility of the central bank. So, too, is runaway money growth. Rapid money growth raised demand above the economys supply potential, leaving too much money chasing too few goods. A monetary response was necessary and sufficient to cure inflation. Hawks also cite Friedmans anti-inflation crusade. He contributed to the natural rate hypothesis, that efforts to push employment above an economys limits simply bid up wages, raising inflation. Yet Friedman also considered variables other than prices. A characteristic of both the contraction of the 1930s and the Japanese stagnation of the 1990s, he noted, was the drag of tight money on nominal GDP. Reversing this would have the same effect as always, he said: output will grow, and after another delay, inflation will increase moderately. In 1984 he wrote that slow, steady monetary growth was not a necessary implication of monetarist theory. And when an economic crash in 1990s Japan gave way to a feeble

recovery and deflation, Friedman recommended a monetary kiss of life in the form of QE. Free exchange; The Chicago question; Jul 28th 2012; The Economist

//MONETARISM Margaret Thatcher was elected as Prime Minister in Britain in 1979. She was voted into office at a time when the British economy was undergoing an inflationary crisis that was mainly due to oil price hikes by the Saudis in response to political instability in the Middle East coupled with unions demanding that their wages keep pace with inflation. Thatcher and her advisers relying on the work of Milton Friedman believed that it was the expansion of the money supply pure and simple that caused inflation. The monetarists essentially allowed the Thatcher government to pretend that the inflation Britain was facing had nothing to do with either international or class politics and was simply a technocratic problem with a technocratic solution. The monetarists claimed that the British government need no longer use straightforward interest rate targeting to get inflation under control. Instead they would simply target the supply of money and let interest rates fall where they may. Between the last quarter of 1978 and the last quarter of 1980 the M3 measure of the money supply the target of the monetarists rose by some 32.8%; this was significantly faster than in the years before the targets had been initiated. Meanwhile unemployment skyrocketed and businesses shut their doors. despite the fact that the experiment was a complete failure, the Thatcher government clung onto the policy with a determination that bordered on zealousness. By the mid-1980s the inflation in Britain was coming down. One of the main reasons for this was the fall in oil prices as the OPEC cartel drew back their price rises. The recession was brought about mainly through the chaotically high interest rates of the period together with tax rises and cuts to government spending The channel through which this affected the economy was mainly that producers became extremely nervous about the future as they saw sales fall The high interest rates also strengthened the British pound which led to exports falling and domestic goods being outcompeted by the now cheaper foreign goods. All this,

coupled with the high and unstable rates of interest they had to pay on loans, led British businesses to cut investment rapidly. As investment fell so too did employment Much of British industry crumbled and went bankrupt; those industries that did survive were much smaller than they had previously been. the objective effect of the policy was to greatly strengthen the value of the British pound through persistently high interest rates. This attracted much foreign capital to the City of London This, together with the light-touch regulation that the Thatcher government favoured, led to financial services becoming a mainstay of the British economy.

Philip Pilkington from: http://www.debtdeflation.com/blogs/2012/07/21/philippilkington-the-new-monetarism-part-i-the-british-experience/ //MONETARISM the consequent diminution is the bargaining strength of labour due to unemployment. Milton Friedman advocated the use of QE policies in Japan back in 1997 Friedman was convinced that the velocity of money was relatively fixed and that there was thus a fairly simple mechanical relationship between the money supply and national income he would also be able to explain inflation as simply being due to the central bank allowing too much money flow into the economy relative to the size of that economy and that all they had to do was target a given money supply to bring the inflation under control. Friedmans monetarism also implied that if the economy had undergone a strong shock or financial crisis and was operating with large amounts of unemployment and excess capacity, all the central bank had to do was inject more money into the system. this extra money would contribute directly to increasing national income that is, it would be spent and invested unemployment would come down. Friedman believed that financial crises, such as the 1929 stock bubble, were simply due to the central bank pumping too much money into the economy.

A monetarist would blame the recent housing bubble in the US on an over-easy money supply. So, what was wrong with Friedmans basic theory? Well, first of all the correlations he thought he found were not the same across time and space. If the data for many countries is compared across time we see strong fluctuations in the velocity of money. Indeed, even within single countries the velocity of money fluctuates quite aggressively in line with overall economic growth. Here, for example, is the velocity of the M2 money supply in the US charted together with the employment-population ratio an indicator of economic health Clearly the velocity of the M2 is not at all constant and moves in rough correlation with the employment-population ratio and, hence, with the health of the economy. The velocity of money does, in fact, vary over time. In actual fact, neither velocity nor the outstanding stock of money have any real bearing on economic activity. only the interest rate set by the central bank has any effect on economy activity and this is through the saving/lending channel, not through some money supply/velocity mysticism.

Philip Pilkington from : http://www.debtdeflation.com/blogs/2012/07/22/philippilkington-the-new-monetarism-part-ii-holes-in-the-theory/

MARKET MONETARISTS Tight money caused Americas Great Recession, they argue, and easy money can end it. They do not think the federal government can or should rescue the economy, because they believe the Federal Reserve can. The market monetarists ...see exaggerated fear of inflation. Lars Christensen, an economist at a Danish bank who came up with the name market monetarism, says it is the first economic school of thought to be born in the blogosphere nominal GDP (NGDP), as opposed to real GDP, which strips out the effects of inflation. They think the central bank should promise to keep NGDP on a steady upward path, rising at, say, 5% a year ...The market monetarists point out that their 5% target is consistent with inflation of about 2%, provided the economy grows at about 3% a year, its rough average for the pre-crisis years. If growth slowed to 1%, inflation would have to be permanently higher, ie 4%. If output suffered a one-time

drop, inflation might have to surge temporarily above 5%. But as growth returned to normal, inflation would recede. the central bank would use many of the same tools as today: tweaking the short-term interest rate and, when that reaches zero, increasing NGDP by printing new money to buy more assets (ie, quantitative easing). And the very creation of the NGDP target would make such intervention more effective, Mr Sumner [Scott Sumner of Bentley University, in Waltham, Massachusetts] says. If people expect the central bank to return spending to a 5% growth path, their beliefs will help get it there. Firms will hire, confident that their revenues will expand; people will open their wallets, confident of keeping their jobs. Those hoarding cash will spend it or invest it, because they know that either output or prices will be higher in the future. If the target were not believed, the Fed would have to do whatever it takes to hit it. That might include heroic purchases of assets, on a bigger scale than anything yet tried by the Fed or the Bank of England. Even then, people might refuse to spend the newly minted money, or the banks might also refuse to lend it. But there are ways to make people spend, say market monetarists like Bill Woolsey of The Citadel, a military college in South Carolina. The Fed could impose a fee on bank reserves, leaving banks to impose a negative interest rate on their customers deposits. That might simply serve to fill up sock-drawers as people took the money out of their accounts. But eventually, instead of hoarding currency, they would spend and invest it, bidding up prices and, with luck, boosting production.

Heterodox economics; Marginal revolutionaries; Dec 31st 2011; The Economist