I thought it already had? #1565313

US Federal Reserve chair Kevin Warsh is a huge fan of the late economist Milton Friedman, the founding father of monetarism. And although targeting the money supply went out of fashion in the 1980s after its failure to control inflation adequately, Warsh is seeking to use his task forces to breathe new life into the idea.

At his Jackson Hole speech in August, Warsh said: “We should pay attention to money created by the central bank and money that comes from the banking and financial systems. It’s true that financial innovations and other factors alter the mechanics that link the monetary base, the velocity of money and the broader economy. But that is scarcely a reason to ignore the ultimate effects of money on financial conditions and prices.”

Yes. Monetary policy without careful attention to money is retarded, at best.

"Warsh has put two of his five task forces to work to bring monetarism back to the centre of Fed thinking."

Here's a nice summary of four decades of elite monetary thought:

I am not going to delve into the long economic debate over the role of money in an economy, but will simply note that Friedman’s ideas became fashionable in the 1960s and 1970s following the failure of postwar Keynesian economics to control inflation. They were further boosted internationally by the Bundesbank’s remarkable success in achieving price stability in the 1970s using money supply as its primary indicator. But monetarism fell by the wayside a decade later when monetary indicators increasingly lost their ability to predict and target inflation.

The waxing and waning of monetarism’s popularity was primarily a practical matter, although that did not stop huge doctrinal disputes in the profession and in politics.

The main reason we are talking about monetarism again is practical. The money supply grew sharply during the post-Covid-19 pandemic period, especially in the US. Inflation followed soon after across the globe, as the chart below shows.

Yes, reality sort of vindicated monetarism quite a while back #1565313

According to the monetarist outlook, the rise in money balances was a sure sign that a surge of spending and inflation was coming. Prominent monetarists Tim Congdon and Steve Hanke noticed this and correctly predicted inflation trouble.

Note: The other option is to go some fiscal expectation route like John Cochrane does.

It is obvious that excess money supply can generate inflation and the pandemic experience certainly tells us that ignoring money in an economy can be a serious oversight. At a minimum, Warsh is correct to call attention to the money supply. That is, after taking account of known reasons for monetary moves that are unlikely to affect prices, such as financial innovations and other developments that might affect the velocity of money. The point of that caveat is to remember that if the speed that money flows around the economy slows — for example, if people cannot spend it in a pandemic — a larger stock will not necessarily be inflationary.

I mean, yes -- for the time being. Like... removing the safety pin of a grenade won't necessarily cause an explosion. Just wait until dude lets go of the [whatever-that-thing-is-called]. Or: look, if I blow up a bubble nothing bad will necessarily happen... yeah, until it pricks. Moron.

Interesting 2023 research from the Bank for International Settlements found that money supply movements generally do not matter if inflation is close to target. But during a highly inflationary episode, money’s importance grows strongly as a predictor of inflation. In short, it would be very odd for monetary policymakers not to consider the potential effect of money on the price level and to think the interest rate is the sole thing that matters for the transmission of policy to inflation.

OK, but now you're gaslighting us. Because a) that was the case by economists and monetary policymakers for two decades, and b) appealing to that belief was exactly why the transitory people got it so wrong in 2021-22!

Jezus, fucks.

If there had been a sudden increase in money balances that spurred spending and inflation, you would expect a roughly uniform increase in the price level. But the European experience in 2022 was of an inflation overwhelmingly concentrated in energy and food prices. This suggests a supply shock, as European Central Bank chief economist Philip Lane has argued.

No it doesn't. Elasticities; many things at once. Also, (new) money has to go somewhere and if they went different places in different jurisdictions, does that negate the monetary premise that excess money -> goods prices??

Also, knock me over with a feather? There are lags; shadow banks/eurodollars matter too! (#1595092)

...and no, idiot; we shouldn't pay close attention to the stablecoins!! They're tiny in comparison, and more importantly, they one-to-one backed by dollar assets (fair enough, usually Treasuries, but they would have ordinarily been repoed and supported bank lending so whatever)

When we are thinking about money supply, we should also consider new forms of money such as stablecoins, which are cryptocurrencies pegged most often to the dollar. The standard journalistic adjectives to describe these digital assets are “fast growing” and “booming”.

archive: https://archive.md/p8Q4l