There are three significant humps in money growth -- in the early 1980s, the late 1980s, and the early 1990s:
 |
| Graph #1: Annual Growth Rates for M1 and Base Money, 1967-2007 |
I want to say that M1 growth was supported by base money growth.
You (not Jim specifically) may tell me that the growth of base money was forced -- that the Fed had no choice -- because private-sector money is the driving force.
I will say: Of course the Fed had a choice. (See that thin blue spike between the 1980 and 1982 recessions? There was no matching increase in base money then, was there? Because Paul Volcker chose not to allow it.) There is always a choice, until it's too late.
I do agree that the Fed's power has waned in the decades since WWII, and that private sector money has become more and more the driving force. But this decay of Federal power happened because of the growth of finance -- because of the perpetual increase in the ratio of private-issue to Federal-issue money.
Further, if you are saying private-sector money is the driving force and that's final, then you are saying monetary policy is powerless, and life as we know it is over.
2 comments:
Monetary policy isn't powerless, it's just not very useful as a tool for managing the macro economy. It can make small, fine-tuning adjustments that are easily overwhelmed by other factors or they can turn it up to eleven and cause a recession (thanks, Volcker) with very little between the two extremes.
Gee, thanks for the link. I only read the opening and conclusion (and counted pages) but it looks good, and short enough besides. I think I'll read that one.
Before I even looked at the PDF I was going to respond by saying I think the effectiveness of monetary policy varies over the course of a long cycle -- be it the Kondratieff or Greenspan's financial cycle or the Elliot wave or the Cycle of Great Depressions, I cannot say. Sometimes monetary policy is less effective, and sometimes it is more effective. (In the post I said "the Fed's power has waned in the decades since WWII".)
Then I opened the PDF that you link to. In their opening sentence they write:
The purpose of this paper is to further consider the nature and role of monetary policy when money is envisaged as credit money endogenously created within the private sector (by the banking system).
The time "when money is envisaged as credit money endogenously created within the private sector" is now. The way the economy looks to you, now, is the way it is... now. That's how it was in the Roaring '20s, too. But it was different -- it was better -- in the 1950s and '60s.
Understanding this to be a cyclical phenomenon facilitates understanding of the problem, and helps with the design of a good solution.
Post a Comment