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Thursday, October 27, 2016

Ramesh Ponnuru Makes Case For Loose Money

Ramesh Ponnuru writes in a Bloomberg View column,

We don’t have loose money, and we haven’t during our entire economic slump. A big reason that slump has been so deep and long is that the Fed is keeping money tight: It’s not letting the money supply increase enough to keep current-dollar spending growing at its historical rate.

That view sounds crazy to a lot of people. They look at low interest rates, soaring commodities prices and an expanded money supply, and assume that these are clear indications of easy money. And sometimes these conditions do reflect monetary ease.

But not always. The late great Milton Friedman looked at Japan’s lost decade and grasped that its low interest rates were, counter-intuitively, a sign of tight money: The Bank of Japan had choked the life out of the economy by keeping the money supply too low, and that’s what kept interest rates down.

Short-term moves in commodity prices are not reliable evidence of inflation, either. Otherwise we would have to conclude that we have loose money any time Asian consumption of precious metals increases, or there’s a disruption of the oil markets.

As for the money supply, its increase signifies looseness only if the demand for money balances stays constant. If the supply rises but demand rises even faster, then the central bank has, perhaps inadvertently, allowed money to tighten.

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  • kurt.lorentzen

    While that observation is true, I believe it fails to look at the money situation beyond a domestic point of view. The reason money is being kept “tight” is because our dollar value has declined internationally to the point that its long-standing status as the de facto exchange medium is threatened (in isolated cases, no longer used). If our chief creditors (China) and/or OPEC stop trading in US currency it takes away a huge amount of purchasing power and deferred payment status and will hurt us domestically in unforeseen ways. Currency is our major export. We can’t just keep shipping dollars overseas and then printing up more paper to make up the difference.