Been neglecting Siggy recently, so here's a nice throwback-Tuesday for a nice piece of monetary history/current affairs reflection on monetarism... as that's in high favor #1603536

Everything you know about the Great Recession is wrong. That’s the hard sell in Scott Sumner’s new book Money Illusion: Market Monetarism, the Great Recession, and the Future of Monetary Policy. It wasn’t caused by greedy bankers or by deregulation, not by a housing bubble, and not even by the Federal Reserve’s easy money policy, which wasn’t easy.  
To tell the story of how so many economists and lay people got the Great Recession wrong, Sumner must take you through a painstaking yet illuminating journey of our macroeconomic past, and the shrouded role that monetary mismatches played in past recessions. It includes a primer on what money is and how economists think about inflation. And, finally, it’s a manifesto for market monetarism.

I don't particularly like Sumner and his weird, nominal-rigidities-are-natural-and-unyielding version of monetarism.... but now that monetarism is sexy again, might be worth a dust-off: #1603536, #1565313

The Money Illusion I recall being a great book, and it started with a remarkable simple proof-of-concept: list ALMOST A HUNDRED COUNTRIES over forty years, and compare their

• % change in P, the price level
• % change in M, the money supply
• % change in Y, real GDP. #1612227

For the high-inflation half of the lot, the M and P changes are almost all identical (with a handful of percent)... for the low-inflation lot, the correlation is much less robust. Anyway, from there Scott starts exploring the quantity theory of money and the equation of exchange underlying all monetarist thinking:

(I just googled up a colorful equation... can't write graphs on SN, unlike certain resident math expert here...)

He schedules his books/intellectual insights around that very simple phenomenon... money comes, money goes; and who holds it/how much of it they hold mitigates and ameliorates what happens to P and also Y.

As an illustration of how comprehensive Sumner’s preamble and homework is, it takes him roughly two-thirds through the book before he properly explains what market monetarism is: “it combines the old-style monetarism of Milton Friedman with the theories of rational expectations and efficient markets of Robert Lucas and Eugene Fama.” Three theses form the core of the market monetarist argument:

1. Shocks to the supply and demand for money drive nominal aggregates;
2. Unexpected movements in nominal aggregates drive fluctuations in output and unemployment as well as financial instability; 
3. The market forecast of macroeconomic variables “provides the optimal way of understanding what’s going on with the economy.”

You can see why I like the guy so much.... minus the nonsense about wage stickiness and nominal debt contracts. ALL HAIL INDEXATION! #1552045

Every chapter sows the seed of more questions. It’s the kind of book where you learn something on every single page – often several astonishing things. The reader must constantly fight the distraction of tracking down a reference for this or that point, exploring deeper the argument Sumner has so expertly condensed.

"Against those who worry about monetary policy’s potency once interest rates approach zero, Sumner scoffs and shows that monetary policy is about money, not interest rates."

TWO warnings:

• don't reason from a price change
• don't gauge stance of monetary policy by nominal interest rates

We can’t conclude, like so many did in 2008, that Fed policy was easy and stimulative just because target interest rates were “low” – we must know what else changed. If the natural rate (or equilibrium rate) which the Fed aims to match fell faster than the Fed cut rates, monetary policy actually became tighter during the Great Recession

From these three forgotten monetary ideas, Sumner digs out truth

easing of monetary policy is not synonymous with lower nominal interest rates, other asset prices convey information about the stance of monetary policy, and monetary policy can be highly effective even when nominal rates are at zero

What I didn't like is that he thinks EVERYTHING is the most important thing

...and he has no friends:

By his words alone, Sumner isn’t making many friends. He claims that asset markets are reasonably efficient; stock market crashes don’t cause recessions; the housing bubble in the 2000s wasn’t a housing bubble. He is a supply-and-demand sider, not an exclusively left-leaning Keynesian with a focus on (government) spending, nor a right-leaning supply-sider focusing on government’s crowding out or disincentives to work. He marshals sticky wages (a New Keynesian concept) and efficient market hypothesis (Chicago School) and pragmatically builds his theory with both components.

"“Nothing is as it seems in the world of money,” Sumner concludes,"

P.S., in case you missed it... money illusion is the basic economic concept of mistaking a nominal change for a real one #737272 -- TYPICAL example, celebrating a 3% wage increase when CPI is 5%... or "earning" 2% interest on $100 bank deposit when prices increased by 3%.