All posts in category Milton Friedman

Friedman’s Japanese lessons for the ECB

I often ask myself what Milton Friedman would have said about the present crisis and what he would have recommended. I know what the Friedmanite model in my head is telling me, but I don’t know what Milton Friedman actually would have said had he been alive today.

I might confess that when I hear (former?) monetarists like Allan Meltzer argue that Friedman would have said that we were facing huge inflationary risks then I get some doubts about my convictions – not about whether Meltzer is right or not about the perceived inflationary risks (he is of course very wrong), but about whether Milton Friedman would have been on the side of the Market Monetarists and called for monetary easing in the euro zone and the US.

However, today I got an idea about how to “test” indirectly what Friedman would have said. My idea is that there are economies that in the past were similar to the euro zone and the US economies of today and Friedman of course had a view on these economies. Japan naturally comes to mind.

This is what Friedman said about Japan in December 1997:

“Defenders of the Bank of Japan will say, “How? The bank has already cut its discount rate to 0.5 percent. What more can it do to increase the quantity of money?”

The answer is straightforward: The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.

There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately. A return to the conditions of the late 1980s would rejuvenate Japan and help shore up the rest of Asia.”

So Friedman was basically telling the Bank of Japan to do quantitative easing – print money to buy government bonds (not to “bail out” the government, but to increase the money base).

What were the economic conditions of Japan at that time? The graph below illustrates this. I am looking at numbers for Q3 1997 (which would have been the data available when Friedman recommended QE to BoJ) and I am looking at things the central bank can influence (or rather can determine) according to traditional monetarist thinking: nominal GDP growth, inflation and money supply growth. The blue bars are the Japanese numbers.

Now compare the Japanese numbers with the similar data for the euro zone today (Q1 2012). The euro zone numbers are the red bars.

Isn’t striking how similar the numbers are? Inflation around 2-2.5%, nominal GDP growth of 1-1.5% and broad money growth around 3%. That was the story in Japan in 1997 and that is the story in the euro zone today.

Obviously there are many differences between Japan in 1997 and the euro zone today (unemployment is for example much higher in the euro zone today than it was in Japan in 1997), but judging alone from factors under the direct control of the central bank – NGDP, inflation and the money supply – Japan 1997 and the euro zone 2012 are very similar.

Therefore, I think it is pretty obvious. If Friedman had been alive today then his analysis would have been similar to his analysis of Japan in 1997 and his conclusion would have been the same: Monetary policy in the euro zone is far too tight and the ECB needs to do QE to “rejuvenate” the European economy. Any other view would have been terribly inconsistent and I would not like to think that Friedman could be so inconsistent. Allan Meltzer could be, but not Milton Friedman.

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* Broad money is M2 for Japan and M3 for the euro zone.

Related posts:

Meltzer’s transformation
Allan Meltzer’s great advice for the Federal Reserve
Failed monetary policy – (another) one graph version
Jens Weidmann, do you remember the second pillar?

16 Comments
by Lars Christensen on August 15, 2012  •  Permalink
Posted in Allan Meltzer, ECB, euro crisis, Japan, Milton Friedman, Monetary institutions, Monetary policy, MV=PY, QE
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Posted by Lars Christensen on August 15, 2012

https://marketmonetarist.com/2012/08/15/friedmans-japanese-lessons-for-the-ecb/

Eichengreen’s reading list to European policy makers

Barry Eichengreen provides a Summer reading list for European policy makers in his latest article on Project Syndicate. Here is Eichengreen:

“Milton Friedman’s and Anna Schwartz’s A Monetary History of the United States belongs at the top of the list. At the center of their gripping narrative is a chapter on the Great Depression, anchored by an indictment of the US Federal Reserve Board for responding inadequately to the mounting crisis.

Friedman and Schwartz are generally seen as reproving the Fed for failing to react swiftly to successive waves of bank failures, first in late 1930 and then again in 1931 and 1933. But a close reading reveals that the authors reserve their most scathing criticism for the Fed’s failure to initiate a concerted program of security purchases in the first half of 1930 in order to prevent those bank failures.

That is a message that the European Central Bank’s board members could usefully take to heart, given their announcement on August 2 that they were ready to respond to events as they unfolded but were taking no action for now. Reading Friedman and Schwartz will remind them that it is better to head off a crisis than it is to rely on one’s ability to end it.”

So true, so true…if just European policy makers had read and understood “Monetary History” then we would not be trapped in this crisis.

There are a couple of other titles on Eichengreen’s reading list, but in my view he forgets a very important book and that is his own “Golden Fetters”. Anybody who would like to understand the international monetary perspectives of the Great Depression should read “Golden Fetters”. And if you understand that you have a much better idea about the international monetary sources of the present crisis. Read Eichengreen’s “Golden Fetters” and replace “gold standard” with “dollar standard” everywhere and then you will get a pretty good idea about why we are still in this crisis. In the Great Depression it was excess demand for gold (from Europe) that caused the crisis. Today it is excess demand for dollars, which is causing the crisis. European policy makers should especially concentrate on what Eichengreen has to say about the mistakes made by European policy makers in 1931-32.

One day I hope to write a book with the title “Green Fetters”, but it will never be as good as “Golden Fetters”, but the topic would be the same – the insane commitment to a failed monetary regime and its dire consequences for the global economy. If just only policy makers would learn a bit from history.

HT David Altenhofen

PS See also Eichengreen’s critique of the ECB’s and the Fed’s inaction here (In German).

Related posts:

Between the money supply and velocity – the euro zone vs the US

International monetary disorder – how policy mistakes turned the crisis into a global crisis

1931-33 – we should learn something from history

Recommend reading for aspiring Market Monetarists

5 Comments
by Lars Christensen on August 14, 2012  •  Permalink
Posted in Anna Schwartz, Barry Eichengreen, Golden Fetters, Green Fetters, Milton Friedman, Reading recommendations
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Posted by Lars Christensen on August 14, 2012

https://marketmonetarist.com/2012/08/14/eichengreens-reading-list-to-european-policy-makers/

Cochrane’s inconsistencies

I just came across a couple of weeks old post from John Cochrane’s blog. Cochrane seems to be very upset about the calls for easier monetary policy in the euro zone. Let’s just say it as it is. Even though Cochrane is a professor at the University of Chicago he is certainly not a monetarist. It is sad how the University of Chicago has totally abandoned its proud monetarist traditions.

Here is Cochrane:

“As you might have guessed, I think it’s a terrible idea (Cochrane refers to a weakening of the euro engineered by easier monetary policy)…The biggest reason is the vanity that you can do it just once. “Devalue and inflate the currency” is hardly a new idea. Portugal, Italy, Spain, and Greece lived on a cycle of continual devaluation and inflation until they joined the Euro.  Going on the Euro was a hard won transformation to precommit to get off this cycle. “

Hence, Cochrane thinks easier monetary policy is very evil. However, in the in the comment section Cochrane states the following:

“I like a price level target. I view money as a set of units for value, and I don’t think the government artfully devaluing the meter and kilo to give shopkeepers a boost is a good idea, any more than fooling with inflation to do so, even if it does “work,” at least once. I’m less of a fan of NGDP targets, and the link from interest rates to price level is pretty tenuous…More coming, a comment isn’t the place for an entire monetary-fiscal program.”

Again you would think that Milton Friedman would be screaming from economist heaven about Cochrane’s odd references to the “tenuous” link between the price level and interest rates – as if interest rates are telling us much about monetary policy. Anyway, note that Cochrane says he likes a price level targeting regime. Fine with me. Then why not endorse Price Level Targeting for the euro zone professor Cochrane?

The graph below shows the euro zone GDP deflator and a 2% trend path for prices. The 2% path is of course what the ECB would be targeting if it implemented a Price Level Target as supported by Cochrane. Now have a look at the graph again and tell me what the ECB should do now if it was a Price Level Targeter?

The graph is very clear: Monetary policy is far too tight in the euro zone and as a result the actual price level is far below the pre-crisis 2% path level.

If Professor Cochrane was consistent in his views then he would obviously conclude that the ECB’s failed monetary policies are keeping the euro zone price level depressed, but I am afraid he did not even care to study the numbers.

Cochrane should obviously be calling for massive monetary easing in the euro zone. Milton Friedman would do so.

I can only again say how sad it is that the University of Chicago professors continue to disregard the economics of Milton Friedman.

PS I hope I am wrong about the University of Chicago so I would be happy if my readers would be able to find just one staffer at UC that is actually a monetarist. Ok, I would be happy if you could just locate a student at UC who has read anything Milton Friedman had to say about monetary theory.

PPS I really do not like this kind of attack on what other economists are writing on their blogs. However, as an admirer of Milton Friedman the continued indirect badmouthing of Friedmanite monetarism by the present day University of Chicago professors upsets me a great deal.

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Related posts:

See here on another University of Chicago professor who doesn’t care about Milton Friedman.

Another post on why the ECB should target the GDP deflator rather than HICP.

10 Comments
by Lars Christensen on August 4, 2012  •  Permalink
Posted in John Cochrane, Milton Friedman, Price Level Targeting
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Posted by Lars Christensen on August 4, 2012

https://marketmonetarist.com/2012/08/04/cochranes-inconsistencies/

Finding wisdom in letters to The Economist

It is always a pleasure to read The Economist. Normally, however, I do not find the letters to the editor especially interesting. However, when I picked up this week’s edition of the magazine today I stumbled on an interesting letter from Paul DeRosa. Mr. DeRosa writes about what Milton Friedman might have thought of the present crisis.

Here is from Mr. DeRosa’s letter to The Economist:

“At a seminar once, I remember hearing him [Friedman] make the generalization that monetary policy is easy only when the prices of assets are rising faster than the prices of the goods they produce…In any case, this thought applied to any reasonable constructed index of asset prices reveals that the Federal Reserve is barely on the easy side of neutral, and the European Central Bank has Europe in death grip”

I find Mr. DeRosa’s comments extremely interesting. The comments are interesting because it indicates that Milton Friedman indeed paid attention to asset prices as an indicator for the monetary policy stance – something that of course is at the core of Market Monetarism. Second, I believe the Mr. DeRosa’s conclusion is entirely correct – the markets are clearly telling us that monetary policy in the euro zone is insanely tight – and that the Fed is not doing a much better job.

6 Comments
by Lars Christensen on August 3, 2012  •  Permalink
Posted in Milton Friedman, Monetary policy
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Posted by Lars Christensen on August 3, 2012

https://marketmonetarist.com/2012/08/03/finding-wisdom-in-letters-to-the-economist/

The luck of the ‘Scandies’

This week we are celebrating Milton Friedman’s centennial. Milton Friedman was known for a lot of things and one of them was his generally skeptical view of pegged exchange rates. In his famous article “The Case for Flexible Exchange Rates” he argued strongly against pegged exchange rates and for flexible exchange rates.

Any reader of this blog would know that I share Friedman’s sceptical view of fixed exchange rates. However, I will also have to say that my view on exchange rates policy has become more pragmatic over the years. In fact one can say that I also in this area have become more of a Friedmanite. This could seem as a paradox given Friedman’s passionate defence of floating exchange rates. However, Friedman was not dogmatic on this issue. Rather Friedman saw exchange rate policy as a way to control the money supply and he often argued that small countries might not have the proper instruments and “infrastructure” to properly control the money supply. Hence it would be an advantage for certain countries to “outsource” monetary policy by pegging the currency to for example the US dollar. Hong Kong’s currency board and its peg to the dollar was his favourite example. I am less inclined to think that Hong Kong could not do better than the currency board, but I nonetheless think Friedman was right in the sense that there fundamentally is no difference between using for example interest rates to control the money supply and using the exchange rate.

In his highly recommendable book Money Mischief Milton Friedman discusses the experience with fixed exchange rates in Chile and Israel. Friedman documents Chile’s horrible experience with fixed exchange rates and Israel’s equally successful experience with fixed exchange rates. It is in relation to these examples Friedman states that one never should underestimate the importance of luck of nations. That credo has been a big inspiration in my own thinking and has certainly helped me understand the difference in performance of different economies during the present crisis. It is not only about policy. With the right policies this crisis could have been avoid, but on the other hand despite of less than stellar conduct of monetary policy some countries have come through this crisis very well. Luck certainly is important.

The Scandinavian economies provide an excellent example of this. Denmark and Sweden are in many ways very similar countries – small open economies with high levels of GDP/capita, strong public finances, an overblown welfare state, but nonetheless quite flexible product and labour markets and a quite high level of social and economic cohesion. However, Denmark and Sweden differ in one crucial fashion – the monetary policy regime.

Denmark has a fixed exchange rate (against the euro), while Sweden has a floating exchange rate and an inflation targeting regime. The different monetary policy regimes have had a significant impact on the performance of the Danish and the Swedish economies during the present crisis.

2008-9: Sweden’s luck, Denmark’s misery

When crisis hit in 2008 both Denmark and Sweden got hit, but Denmark suffered much more than Sweden – not only economically but also in terms of financial sector distress. The key reason for this is that while monetary conditions contracted significantly Sweden did not see any major monetary contraction. What happened was that as investors scrambled for US dollars in the second of 2008 they were selling all other currencies – also the Swedish krona and the Danish krone.

The reaction from the Danish and the Swedish central banks was, however, very different. As the Danish krone came under selling pressures the Danish central bank acted according to the fixed exchange policy by buying kroner. As a result Denmark saw a sharp contraction in the money supply – a contraction that continued in 2009 and 2010, but the peg survived. The central bank had “won” and defended the peg, but at a high cost. The monetary contraction undoubtedly did a lot to worsen the Danish financial sector crisis and four years later Danish property prices continue to decline. On the other hand when the demand for Swedish krona plunged in 2008-9 the Swedish central bank allowed this to happen and the krona weakened sharply. Said in another way the Swedish money demand dropped relative to the money supply. Swedish monetary conditions eased, while Danish monetary conditions tightened.

It is often said, that Sweden’s stronger economic performance relative to Denmark in 2008-9 (and 2010-11 for that matter) is a result of the relative improvement in Swedish competitiveness as a result of the sharp depreciation of the Swedish krona. However, this is a wrong analysis of the situation. In fact the major difference between the Swedish economy and the Danish economy has very little to do with the relative export performance. In fact both countries saw a more or less equal drop in exports in 2008-9. The big difference was the performance in domestic demand. While Danish domestic demand collapsed and property prices were in a free fall, domestic demand in Sweden performed strongly and Swedish property prices continued to rise after the crisis hit. The difference obviously is a result of the different monetary policy reactions in the two countries.

This is basically luck – the Danish monetary regime led to tightening of monetary conditions in reaction to the external shock, while the Swedish central bank to a large extent counteracted the shock with an easing of monetary conditions.

2012: The useful Danish peg and the failures of Riksbanken

Today the Danish economy continues to do worse than the Swedish economy, but the luck is changing. And again this has to do with money demand. While the demand for Swedish krona and Danish kroner collapsed in 2008-9 the opposite is the case today. Today investors as a reaction to the euro crisis are running scared away from the euro and buying everything else (more or less). As a result money is floating into both Denmark and Sweden and the demand for both currencies (and Swedish and Danish assets in general) has escalated sharply. So contrary to 2008-9 the demand for (local) money is now rising sharply. This for obvious reasons is leading to appreciation pressures on the Scandinavian currencies.

Today, however, the Danes are lucky to have the peg. Hence, as the Danish krone has tended to appreciate the Danish central bank has stepped in and defended the peg by expanding the money base and for the first time in four years the Danish money supply (M2) is now showing real signs of recovering. This of course is also why Danish short-term bond yields and money market rates have turned negative. The money markets are being flooded with liquidity to keep the krone from strengthening. Hence, the Danish euro peg is doing a great job in avoiding a negative velocity shock. For the first time in four years Danes could be true happy about the peg.

On the other hand for the first time in four years the Swedish monetary policy regime is not work as well as one could have hoped. As the demand for Swedish krona has escalated Swedish monetary conditions are getting tighter and tighter day by day and the signs are pretty clear that Swedish money-velocity is contracting. This is hardly good news for the Swedish economy.

Obviously there is nothing stopping the Swedish central bank from counteracting the drop in velocity (the increased money demand) by expanding the money base and legendary Swedish deputy central bank governor Lars E. O. Svensson has been calling for monetary easing for a while, but the majority of board members in the Swedish central bank seem reluctant to step up and ease monetary policy even though it day by day is becoming evident that monetary easing is needed.

Good policies are the best substitute for good luck

Obviously neither the Danish nor the Swedish monetary policy regime is optimal under all circumstances and this is exactly what I have tried to demonstrate above. The difference between 2008-9 and 2011-12 is the impact on demand for the Danish and Swedish currency and these differences have been driven mostly by external factors.

Obviously one could (and should!) argue that Sweden’s problem today is not the floating exchange rate, but rather the inflation targeting regime. If Sweden instead had been targeting the (future) nominal GDP level then Riksbanken would already had eased monetary policy much more aggressively than has been the case to counteract the contraction in money-velocity.

Finally, it is clear that luck played a major role in how the crisis has played out in the Scandinavian crisis. However, with the right monetary policies – for example NGDP targeting – you are much more likely to have luck on your side when crisis hit.

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Related posts:

Milton Friedman on exchange rate policy #1
Milton Friedman on exchange rate policy #2
Milton Friedman on exchange rate policy #3
Milton Friedman on exchange rate policy #4
Milton Friedman on exchange rate policy #5
Milton Friedman on exchange rate policy #6
Is monetary easing (devaluation) a hostile act?
Danish and Norwegian monetary policy failure in 1920s – lessons for today
“The Bacon Standard” (the PIG PEG) would have saved Denmark from the Great Depression
Bring on the “Currency war”
Exchange rates and monetary policy – it’s not about competitiveness: Some Argentine lessons

24 Comments
by Lars Christensen on August 2, 2012  •  Permalink
Posted in Denmark, euro crisis, Exchange rate policy, Exchange rates, Milton Friedman, Sweden
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Posted by Lars Christensen on August 2, 2012

https://marketmonetarist.com/2012/08/02/the-luck-of-the-scandies/

Dear Milton

Happy birthday. I am sure that you are celebrating it with your beloved wife Rose in economist heaven.

Today it is 100 years ago you were born in Brooklyn New York. Your parents Sarah and Jeno surely must have been proud of you. I hope they are celebrating with you today as well – and you surely have given them a lot to be proud of over the past 100 years.

You undoubtedly share the top spot as the most famous economist in the world of the past century with your ideological counterpart John Maynard Keynes.

I first came across your work at an age of 16 or 17 years in the mid-1980s when I discovered the Danish edition of “Free to Choose”. I still remember reading it and since then I must admit that I have not stopped talking about Milton Friedman.

Free to Choose had a profound impact on my thinking. I became both a libertarian – or a classical liberal as you would say – and a monetarist. And the book convinced me that I would have to become an economist and so I did.

Free to Choose in my view is a revolutionary book. It might seem harmless, but most people who have read Free to Choose become convinced that the Freedom of Choice should be the foundation on which to build our society. Your ideas of school vouchers and the negative income tax had a very strong impact on my own thinking. It was these ideas that convinced me that individuals rather than government should be in charge of their own life.

You have always stressed that you are not a conservative. You are a classical liberal. That among other things means that you strongly opposed the military draft and you where instrumental in getting rid of this instrument of human slavery. In the 1980s and 1990s you got involved in the struggle to end the idiotic war on drugs. Unfortunately that war continues to this day. I have always seen your stance on these issues as a clear illustration of how great a humanitarian you are.

But you are not only a humanitarian. You are a great teacher and pedagogue. Just ask anybody who have studied at the University of Chicago while you were a professor there or anybody who have watched the “Free to Choose” TV series.

Speaking of the Free to Choose TV series. There is no doubt my favourite part of the TV series is the episode on inflation. The corresponding chapter in the Free to Choose book is what turned me into a monetarist. Before reading Free to Choose I thought that inflation was created by greedy and evil labour unions. Now I know that inflation is always and everywhere a monetary phenomenon. I still remember my fascination with the graphs in Free to Choose where you had plotted the money supply (relative to GDP) and the price level in different countries and I still find myself doing similar graphs on a regular basis – just have a look at my blog.

When you started the monetarist counterrevolution and reintroduced economists to Quantity Theory (and the equation of exchange MV=PY) in the 1950s most economists had forgotten about the importance of money. Today no serious economists will disagree that inflation is a monetary phenomenon.

There is no doubt that monetarism has been the single greatest intellectual influence on my own thinking and I rarely encounter a macroeconomic problem, which I would not analysis by looking at monetary matters. I learned from you that money matters.  Robert Solow once said, “Everything reminds Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers.”

Solow was of course joking, but he was right – you put the analysis of money at the centre of macroeconomic analysis. Unfortunately Solow and his compatriot Keynesians never understood the importance of money. Luckily you won. Eventually central banks started to understand and as a result inflation came under control in the 1980s around the world. I doubt that would have been possible had you not been around to teach policy makers the lesson. And that is one of your major qualities. You might disagree with people, but that never kept you away from having a dialogue – whether it was in Chile or China.

Today the problem is not inflation, but rather the risk of deflation. I do not know what you would think of the crisis today. I, however, know what I think of the crisis and that have been greatly influenced by your thinking – particularly by that great book you wrote with Anna Schwartz on the Monetary History of the United States. Monetary History undoubtedly is one of the most important books ever written on macroeconomic issues. Anybody who wants to understand what is happening today should read Monetary History and study your analysis of the causes of the Great Depression. You and Anna showed that the Great Depression was caused by the failure of the Federal Reserve to ease monetary policy. The Fed did it and I imagine that you sit in economist heaven and shake your head at the incompetence of today’s central bankers. They failed again. Sadly Anna Schwartz died recently, but I am sure that she has joined you and Rose in economist heaven.

I could go on and on about your contributions to economics and to the general societal debate around the world. And I could go on about the impact you have had on my own thinking, yes indeed on my life. It is now 11 years ago my book about your contribution to economics was published. I am proud of that book because it is a tribute to your work. I still regret not sending you a copy, but even though I think you are brilliant I doubt you would have been able to read it in Danish.

Anybody who has been following my blog will know that I to this day remains a Friedmanite. That goes for my politics, but even more for my economic thinking. I believe in freedom. I believe in free markets. I believe that we can not understand macroeconomic matters without understanding money.

Milton, you are missed but certainly not forgotten and now I think it is time for a toast. We raise our glasses and celebrate you on this day.

15 Comments
by Lars Christensen on July 31, 2012  •  Permalink
Posted in Milton Friedman
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Posted by Lars Christensen on July 31, 2012

https://marketmonetarist.com/2012/07/31/dear-milton/

Did Casey Mulligan ever spend any time in the real world?

University of Chicago economics professor Casey Mulligan has a new comment on Economix. In his post “Who cares about Fed funds?” Mulligan has the following remarkable quote:

“New research confirms that the Federal Reserve’s monetary policy has little effect on a number of financial markets, let alone the wider economy.”

Mulligan’s point apparently is that the Federal Reserve is not able to influence financial markets and as a consequence monetary policy is impotent. First of all we have to sadly conclude that monetarism is nonexistent at the University of Chicago – gone is the wisdom of Milton Friedman. I wonder if anybody at the University of Chicago even cares that Friedman would have turned 100 years in a few days.

Anyway, I wonder if Casey Mulligan ever spent any time looking at real financial markets – especially over the past four years. I have in a number of blog posts over the last couple of months demonstrated that the major ups and downs in both the US fixed income and equity markets have been driven by changes in monetary policy stance by the major global central banks – the Fed, the ECB and the People’s Bank of China. I could easy have demonstrated the same to be the case in the global commodity markets.

Maybe Casey Mulligan should have a look on the two graphs below. I think it is pretty hard to NOT to spot the importance of monetary policy changes on the markets.

Of course it would also be interesting to hear an explanation why banks, investment funds, hedge funds etc. around the world hire economists to forecast (guess?) what the Fed and other central banks will do if monetary policy will not have an impact on financial markets. Are bankers irrational Professor Mulligan?

Anyway, I find it incredible that anybody would make these claims and it seems like Casey Mulligan spend very little time looking at actual financial markets. It might be that he can find some odd models where monetary policy is not having an impact on financial markets, but it is certainly not the case in the world I live in.

Let me finally quote Scott Sumner who is as puzzled as I am about Mulligan’s comments:

“Yes, Mulligan is a UC economics professor.  And yes, Milton Friedman is spinning faster and faster in his grave.”

Yes, indeed – Friedman would have been very upset by the fact that University of Chicago now is an institution where money doesn’t matter. It is sad indeed.

Update: Brad Delong is “slightly” more upset about Mulligan’s piece than Scott and I are…

PS Maybe professor Mulligan could explain to me why the US stock market rallied today? Was it a positive supply shock or had it anything to do with what ECB chief Draghi said? And then tell me again that markets do not care about monetary policy…

16 Comments
by Lars Christensen on July 26, 2012  •  Permalink
Posted in Casey Mulligan, Efficient-Market Hypothesis, Milton Friedman, Scott Sumner
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Posted by Lars Christensen on July 26, 2012

https://marketmonetarist.com/2012/07/26/did-casey-mulligan-ever-spend-any-time-in-the-real-world/

You might know the words, but do you get the music?

Back in March I wrote this:

“Some of the most clever economists I have encountered are actually not formally educated economists. In fact a number of Nobel Prize winners in Economics are not formally educated economists. One of my big heroes David Friedman is not formally educated as an economist, but to me he is certainly an economist – one of the greatest around. Another example is Gordon Tullock who was trained as a lawyer, but he is certainly an economist – in fact to me Gordon Tullock is one of the most clever economists of his generation and it is a complete mystery to me that he has not yet been awarded the Nobel Prize in Economics. The way I perceive people’s skills as economists has nothing to do with their formal education. To me Economics is not an education. Economics is a state of mind.

Therefore, you can easily be an economist without having a formal education as an economist. As a consequence there are also people who have been able to attain a formal title as an economist without reaching that higher state of mind that a real economist has. I have unfortunately also encountered many of this kind of “economists” – economists by title, but not in mind. Many of these people are unfortunately high ranking policy makers.”

For years I have been running around telling people that “Economics is not an education. Economics is a state of mind” and I have always believed that I have come up with a great saying. However, it turned out – as with most of my views – that I in some way got it from Milton Friedman. Over the weekend I was re-reading a couple of chapters in Milton’s and Rose’s  memoirs “Two Lucky People”. On page 543 I stumbled on this quote from Milton:

“I have long believed that a feeling for economics is something people are born with rather acquire through education. Many highly intelligent and even highly trained professional economists knows the words but don’t get the music. On the other hand, people with little or no training in economics may have an intuitive feeling for it.”

It be frank I don’t remember ever reading that before, but it is very close to what I said in March. But it is getting even more interesting when you have a look at some comments David Friedman was so kind to make on my post back in March:

“My father’s standard example of your point was Leo Szilard, a physicist who was also at Chicago. Apparently Szilard would come into my father’s office with ideas in economics. Generally they were things economists had worked out much earlier–but they were right….I don’t know of anything my father wrote about Szilard–I’m going by memory, but I’m almost certain I have the right physicist.”

Well David, your father did indeed write about Szilard. This is the footnote (7) to the Milton quote above:

“Another example is my former University of Chicago colleague Leo Szilard, the great physicist and chemist who first discovered the principle of the  chain reaction, and indeed, patented it. He was repeatedly reinventing economic theorems, and getting them right” 

I think this is a very good example of why I have in my book on Friedman called him a “pragmatic revolutionary”. Friedman makes you think. He so to speak installs a certain way of thinking in your brain once you get exposed  to him. It happened to me back in the mid-1980s. Obvious David got the exposure from birth.

12 Comments
by Lars Christensen on July 9, 2012  •  Permalink
Posted in David Friedman, Milton Friedman
Tagged ,

Posted by Lars Christensen on July 9, 2012

https://marketmonetarist.com/2012/07/09/you-might-know-the-words-but-do-you-get-the-music/

My Skåne vacation and what I am reading

It is vacation time for the Christensen family so I might not be blogging too much in the next couple of weeks, but we will see. I would however, like to share what books I have brought with me on our vacation in our vacation home in Southern Sweden (Skåne).

Here is my list of vacation books:

1) “Two lucky people”  is Milton and Rose Friedman’s autobiography. I have read it before, but it is such a nice book about a world class economist and his loving wife. They remained an incredible team throughout their long lives. Did I mention that my copy of Two Happy People is signed by Uncle Milty?

2) Two books – or rather pamphlets – by Gustav Cassel: “The World’s Monetary Problems; Two Memoranda” and “On Quantitative Thinking in Economics”. I have only read a little of both books. Cassel was an amazing writer and I look forward to digging into the books.

3) Of course Bob Hetzel’s “The Great Recession” is in my bag – also on this vacation. I have already long ago read the entire book, however I bring Bob’s book everywhere I go.

4) “The Gold Standard in Theory and History” – edited by Eichengreen and Flandreau back in 1985 is a collection of articles on the gold standard.

5) Tobias Straumann’s “Fixed Ideas of Money” about why small European nations have tended to opt for fixed exchange rate regimes. I have read most of the book. It is an extremely well researched and well written book. I find the book particularly interesting because it describes the monetary history of small countries like Belgium and Denmark. This monetary history of these countries is generally under-researched compared to for example the monetary history of the US or the UK.

6) Larry White’s new book “The Clash of Economic Ideas” about “The Great Policy Debates and Experiments of the Last Hundred Years”. Have read a couple of the chapters in the book even before I got the book, but the latest chapter I read was about the formation of the Mont Pelerin Society (Chapter 8) – it’s a great chapter. The book is a very easy read and very enjoyable. I suspect that this will be the book I will spend the most time with on this vacation. See Larry’s presentation on his book here.

Finally, I must admit I have never been able to read fictional books. Economics, history, philosophy and books about gastronomy, but never fiction (sorry Ayn Rand…)

12 Comments
by Lars Christensen on July 1, 2012  •  Permalink
Posted in Gustav Cassel, Larry White, Milton Friedman, Reading recommendations, Robert Hetzel, Tobias Straumann
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Posted by Lars Christensen on July 1, 2012

https://marketmonetarist.com/2012/07/01/my-skane-vacation-and-what-i-am-reading/

I can hear Uncle Milty scream from upstairs – at James Bullard

The St. Louis Fed has long been a bastion of monetarist thinking, but something has changed at the Eighth Federal Reserve District. Here is St. Louis Fed president James Bullard in an interview with Bloomberg:

“Treasury yields have gone to extraordinarily low levels. That took some of the pressure off the FOMC since a lot of our policy actions would be trying to get exactly that result.”

I can only imagine how Milton Friedman would have reacted to this kind of statement – most likely he would have said something like this:

“Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy..After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.”

Friedman said that in 1998. 14 years later central bankers still make the same mistakes. It is incredible. It makes you want to scream and it is especially frustrating when you hear it from the president of a Fed district with a strong monetarist traditions. Just sad…

HT Matt O’Brien

Update 1: Josh Hendrickson was so kind to remind me about this Friedman quote from Milton Friedman’s Monetary Framework (1974):

“On still another level, the approach is consistent with much of the work that Fisher did on interest rates, and also the more recent work by Anna Schwartz and myself, Gibson, Kaufman, Cagan, and others.  In particular, the approach provides an interpretation of the empirical generalization that high interest rates mean that money has been easy, in the sense of increasing rapidly, and low interest rates, that money has been tight, in the sense of increasing slowly, rather than the reverse.”

Update 2: Vaidas Urba has the following comment about Bullard:

“Very strange to hear this from Bullard, as he wrote the Seven Faces of the Peril paper where he discussed the low interest rate deflationary equilibrium….Bullard: “To avoid this outcome for the United States, policymakers can react differently to negative shocks going forward. Under current policy in the United States, the reaction to a negative shock is perceived to be a promise to stay low…”

So yes, Bullard once (in 2010) understood and now apparently he seem to have forgot about how monetary policy works.

4 Comments
by Lars Christensen on June 28, 2012  •  Permalink
Posted in Interest rate fallacy, Milton Friedman
Tagged , ,

Posted by Lars Christensen on June 28, 2012

https://marketmonetarist.com/2012/06/28/i-can-hear-uncle-milty-scream-from-upstairs-at-james-bullard/

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