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LTMC: Friedman understood that monetary policy holds a unique place in the structure of an economy, and that more goes into debauching a currency than simply printing more money. His thoughts on Japan’s lost decade were completely spot-on: zero percent interest rates are a symptom of overly tight monetary policy. The solution, all else being equal, is more liquidity. Ben Bernanke wrote an article in 1999 that came to the same conclusion. Greg Mankiw (a right-leaning economics professor from Harvard), went so far as to author an open memo in 1999 entitled “Memo to Japan, lower taxes, print money.” Tyler Cowen, an economics professor at George Mason University, recommended back in 2010 that the Fed should move its inflation target from 2% to 3% to incentivize higher velocity. Note that these three economists have very different ideological positions on a range of issues pertaining to economics. But they all seem to agree on the need for expansionary monetary policy during a recession accompanied by a liquidity trap.
Meanwhile, Chinese economists predicting a slowdown last December advocated "slow monetary loosening" to ease the effects of growth reduction. And the central banks of both Switzerland and Sweden have already demonstrated that increasing liquidity during a recession does far more to lift the country out of recession than it does to debauch a nation’s currency. Along the same lines, those who believe that inflation is universally bad should see Switzerland’s and Japan’s attempts to inflate their currencies to shore up exports, which would have had negative economic consequences for both countries.
Friedman understood that economic actors demand money the same as any other good; but he also understood that money is unique because it is the only economic unit that people demand solely for its utility as an exchange proxy for all other goods and services. As a result, trying to figure out what the correct price of money should be is not necessarily intuitive, and is quite often co-relative, as demonstrated by the LIBOR index collusion fiasco. Friedman understood that this creates a unique relationship between a nation’s economy and its monetary policy. And while Frum is perhaps oversimplifying Friedman, I think the thrust of his observation is correct. Friedman advised against self-induced paralysis in 2000, and I have no doubt he would do the same now.
(via jgreendc)
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