Let me spell it out

Market Monetarists say you can tell if money is easy or tight by how the economy is doing: Money is easy if NGDP is above trend, and money is tight if NGDP is below trend. For example, here's part of an analysis from Marcus Nunes:

Note that MP (monetary policy) was “easy” in 1998-99. That follows from the fact that NGDP was rising above trend, irrespective of the FF target rate being reduced (1998) or increased (1999)

Monetary policy was easy then, Marcus says, because NGDP was rising above trend. It has nothing to do with interest rates, he says.

What bothers me about this way of evaluating "easy" and "tight" is that it considers nothing other than NGDP and the money supply. Nothing else. Nothing matters but money, according to these guys. The pendulum has swung from the extreme that "money doesn't matter" to the extreme that money is the only thing that matters.

Hey! I'm big on money. If you want to choke off an economy, choke off the money. If you want the economy to grow, spread money around. These ideas are at the core of my thinking. But I don't reduce all of lawnmower maintenance to turning the idle screw on the carburetor a little bit one way or the other. And I don't reduce all of economic policy to tweaking the flow of money up a little or down a little. There's too much else involved, and too much at stake.


Everybody talks about the financial crisis of five years ago. Everybody focuses on that instead of on the decades-long trends that led up to it. Fine, let's talk about the crisis. What happened in the crisis is that velocity suddenly dropped like a stone:

The Velocity of Money: Still Going Down

People cut back on borrowing:

Additions to Debt: For a While, It Didn't Go Up

And people started saving more, as much as they could afford to save:

The Saving Rate: Still Trying to Go Up

People changed their behavior.

Now, you might say that if people are saving more, then we need more money to keep spending from falling. You might say that if money is moving more slowly, then we need more money to keep spending from falling. And you might even try to say that if people are borrowing less, then we need easier money to get people borrowing more, to keep spending from falling. That last one can't be right, of course. In order to say it, you have to ignore the cost of accumulated debt.

The trouble with easier money as a solution to our current problem is that it doesn't address the problem. Money isn't tight. Money only looks tight because of the changes in our spending habits since the crisis.

Come to think of it, the changes in our spending habits are a response not to the financial crisis, but to those decades-long trends that led inexorably to the crisis. Those long trends must be addressed. Actually, those long trends are being addressed. They are being reversed by our behavior since the financial crisis, as the graphs show.

Those long trends are ignored by the Market Monetarist view of what constitutes "easy" money. And these are all money-related graphs!

Here, dammit, let me spell it out. If people thought they could borrow more, and then over the next few years pay it down and come out ahead at the end, people would borrow more. But since the crisis, everybody knows you don't come out ahead at the end. So the only way to avoid getting deeper in debt is not to borrow.

Change the policies that get us always deeper in debt, and you solve this problem.