Bloomberg repeats the bond yield fallacy (Milton Friedman is spinning in his grave)

This is from Bloomberg:

A series of unprecedented stimulus measures by the ECB to stave off deflation in the 18-nation currency bloc have sent bond yields to record lows and pushed stock valuations higher. “

Unprecedented stimulus measures? Say what? Since ECB chief Mario Draghi promised to save the euro at any cost in 2012 monetary policy has been tightened and not eased.

Take any measure you can think of – the money base have dropped 30-40%, there is basically no growth in M3, the same can be said for nominal GDP growth, we soon will have deflation in most euro zone countries, the euro is 10-15% stronger in effective terms, inflation expectations have dropped to all time lows (in the period of the euro) and real interest rates are significantly higher.

That is not monetary easing – it is significant monetary tightening and this is exactly what the European bond market is telling us. Bond yields are low because monetary policy is tight (and growth and inflation expectations therefore are very low) not because it is easy – Milton Friedman taught us that long ago. Too bad so few economists – and even fewer economic reporters – understand this simple fact.

If you think that bond yields are low because of monetary easing why is it that US bond yields are higher than in the euro zone? Has the Fed done less easing than the ECB?

The bond yield fallacy unfortunately is widespread not only among Bloomberg reporter, but also among European policy makers. But let me say it again – European monetary policy is extremely tight – it is not easy and I would hope that financial reporter would report that rather than continuing to report fallacies.

HT Petar Sisko

PS If you want to use nominal interest rates as a measure of monetary policy tightness then you at least should compare it to a policy rule like the Taylor rule or any other measure of the a neutral nominal interest rate. I am not sure what the Talyor rule would say about level of nominal interest rates we should have in Europe, but -3-4% would probably be a good guess. So interest rates are probably 300-400bp too higher in the euro zone. That is insanely tight monetary policy.

PPS I am writing this without consulting the data so everything is from the top of my head. And now I really need to take care of the kids…sorry for the typos.

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  1. Niels Andersen

     /  November 27, 2014

    Hej Lars

    Can you copy the Friedman article here?

    • Niels, the link is there – the text in blue just after “Milton Friedman”

      • Niels Andersen

         /  November 28, 2014

        Yeah, I know. But there’s a pay wall. Would like to read the article because I really cannot understand it intuitively and I have never heard of it at uni (polit) before.

  2. Niels wrote:
    ” Bond yields are low because monetary policy is tight (and growth and inflation expectations therefore are very low) not because it is easy – Milton Friedman taught us that long ago.”

    You should use the English word: “loose”, as opposed to “tight” in this context. You must be able to comprehend that the use of the word “easy” will confuse to a lot of people. You ought to team up with a young student, whom you’ll email your text to, and who will correct the text grammatically, and propose different words that makes better prose, and he will send it back to you for consideration.

    As it is, these flaws put many people off, and will ensure that you never rises further in the Economic Blog league, the internal position in which you otherwise take great pride in.

  3. jamesxinxlondon

     /  November 28, 2014

    “Who will correct the text grammatically” – x
    “You never rises” – x
    “Otherwise take great pride in” – x
    Please correct your English and resubmit your work.

  4. Niels Andersen

     /  November 28, 2014

    Now, I have read some of your previous posts about the european interest rates and money supply.

    Can you in a few sentences explain how the interest rates can be on all time low when the money supply is tighter? It makes no sence in a classical demand-supply scheme. If money is short, the price (interest rate) on money should go up.

  1. Monetary policy according to a German lawyer | The Market Monetarist

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