Rolf Englund IntCom internetional


News on this page

About Monetarism on my blog

IEA about Monetary Policy - Otmar Issing - CPI - Real interest rates - Conundrum - Stagflation
Finanskrisen/The Great Recession - Stabiliseringspolitik - Next Bubble: U.S. Government Bonds

“The process by which money is created is so simple that the mind is repelled.”
Click here

Recall that the conventional story in which banks merely channel existing funds from savers to those with investments to finance is wrong.
Banks create new money in the form of deposits when they issue loans.
This is why banking is an inherently unstable and destabilising activity.
Martin Sandbu, FT 1 March 2018

Full text


As many of you know, I have spent much of the last seven years explaining to anyone who will listen that banks do not "lend out" deposits or reserves.
Rather, they create both loan assets and matching deposit liabilities "from nothing" by means of double entry accounting entries.
Creating money with a stroke of the pen (or a few taps on a computer keyboard) is what banks do.

Frances Coppola, 29 October 2017

Full text


The Market Monetarist - FT Money Supply

The Center for Financial Stability in New York "Divisia M4"

Rolf Englund på Nationalekonomiska Föreningen, januari 1989

Let me introduce you to John Kenneth Galbraith. He taught at Harvard University for many years and was active in politics, serving in the administrations of Franklin D. Roosevelt, Harry S. Truman, John F. Kennedy, and Lyndon B. Johnson; and among other roles served as United States Ambassador to India under Kennedy.
He was one of a few two-time recipients of the Presidential Medal of Freedom.
Clearly a pretty accomplished and stand-up kind of guy.

About money, he famously said:
“The process by which money is created is so simple that the mind is repelled.”

Money Creation explained

Only the ignorant live in fear of hyperinflation
Failure to understand the monetary system has made it more difficult for central banks to act
Martin Wolf, FT April 10, 2014

Fortunately the Bank of England is providing much needed education.
In its most recent Quarterly Bulletin, its staff explain the monetary system.
So here are seven fundamental points about how it really works as opposed to how people think it does.

The act of saving does not increase deposits in banks. If your employer pays you, the deposit merely shifts from its account to yours.
This does not affect the quantity of money; additional money is instead a byproduct of lending.

What makes banks special is that their liabilities are money – a universally acceptable IOU. In the UK, 97 per cent of broad money consists of bank deposits mostly created by such bank lending.

Banks really do “print” money. But when customers repay, it is torn up.

Understanding the monetary system is essential. One reason is that it would eliminate unjustified fears of hyperinflation. That might occur if the central bank created too much money.

But in recent years the growth of money held by the public has been too slow not too fast.

Full text

Asset price bubbles and Central Bank Policy

Money creation in the modern economy
Bank of England pdf, QB 2014 Q1

Full text at BoE

Full text at IntCom

Lysande och pedagogisk
Too much state-created money is by definition a bad thing. And so is too little.
But how do we know how much is too much and how much too little?
It is a pity that the central banks decided to use the ugly term quantitative easing for what they were doing.
If they had called them “extended open-market operations”, or something similar, they would have had less explaining to do.
Samuel Brittan, Financial Times, October 31, 2013

Full text

Eurozone banks need to shed €3.2tn in assets to meet Basel III
Europe’s biggest banks will have to cut €661bn of assets and generate €47bn of fresh capital
Deutsche Bank, Crédit Agricole and Barclays the banks most in need
Financial Times, August 11, 2013

I think the really interesting question to be asked to which extent central banks have contributed to, or even caused, this crisis.
This is not about Mr Greenspan, or a single monetary policy decision at a particular time, or whether US interest rates were raised too late in the last cycle.
This question relates to the longer-term impact of monetary policy during the age of global disinflation,
which started in the early 1990s, and which has just ended.

The ECB, the Fed, and the Credit Crisis, Wolfgang Münchau. 07.11.2007

The monetarists are rising from the grave
Wolfgang Munchau

See also: Banks...

Modern Monetary Theory (MMT)

Central bank money printing and the mystery of soaring shares
'Why did nobody see it coming?", the Queen asked four years ago on a visit to the London School of Economics,
a brilliantly faux naïve question that cruelly exposed the failings of modern economics.
Well, here's another in a similar vein she might like to ask when she next returns to matters financial.
"How come the stock market is going up, when the economy keeps tanking?"
Jeremy Warner, Telegraph 7 March 2013

It would certainly be nice to think so after five years of blood, sweat and tears, and I don't doubt that sentiment is a lot more positive than it was. Unfortunately, it's failing to filter through to the corporate world, where cash accumulation, not business expansion, continues to be the name of the game, at least as far as stagnant advanced economies are concerned.

Chief executives are not yet anticipating the strong cyclical upturn which stock markets seem to be pointing to. If companies themselves don't think highly enough of our economic prospects to start investing, how come investors do?

One reason is zero interest rates, allowing companies which, in a conventional recession, would have gone bust, to stay in business. At the same time, banks have been bailed out, so that bad debts have in effect been nationalised.

Taxpayers rather than investors are being made to pay the price for past excesses. The insolvency problem has been transferred from the private to the public sector.

The other related explanation is central bank money printing. This may or may not have prevented a much deeper economic collapse, but it has certainly put a rocket under asset prices.

As long as the central banks keep printing, equities will keep rising. Thus do central banks answer each successive bubble by blowing up another.

Eventually it becomes socially and politically unacceptable for companies to keep expanding their profits at the expense of labour.

The backlash is already beginning.

Full text

What is the use of economics if it cannot answer even such a basic question?
Two years ago at the height of the financial crisis, the Queen challenged staff of the London School of Economics with a simple but devastating question:
“Why did no one foresee this?”
The inability of professional economists in Britain and America to agree on something as important as whether
reductions in government deficits will accelerate or slow growth
Anatole Kaletsky, The Times September 29 2010

About six months later the cream of the British economics profession responded with a mealy-mouthed letter of self-justification from the British Academy, waffling on about “a failure of the collective imagination” and “the psychology of denial”.

Some of the developed world’s biggest central banks are trying deliberately to raise inflation.
Their continued failure to do so is arguably damaging the economy, but it boosts asset prices for investors.
If they were ever to succeed, then the relationship between inflation and stocks could itself begin to change.
John Authers, FT, 1 March 2013

A convenient market measure of expected inflation comes from bond market break-evens – the rates of inflation at which the returns on fixed-income bonds would equal the returns from equivalent inflation-linked bonds.

As the chart shows, the relationship between US 10-year inflation break-evens and stocks has been rigid, with the post-Lehman crash of 2008 coinciding with a deflation scare in which investors thought prices would actually fall over the ensuing decade.

Full text

Next Bubble Is Forming: U.S. Government Bonds

It must be flattering for Shinzo Abe, a man whose knowledge of economics is matched only by Ben Bernanke’s expertise in ikebana flower arrangement, to have a whole new branch of the dismal science named after him. “Abenomics” has proved such a potent force that its mere invocation – before any real action to speak of – has helped knock a fifth off the value of the yen and put a third on the value of Japanese equities since October.

At the heart of Abenomics lies a simple, and entirely orthodox, proposition:
that deflation is a monetary phenomenon.
In Japan, where prices as measured by the gross domestic product deflator have fallen 18 per cent since 1994
David Pilling, Financial Times, 20 February 2013

For more than a decade, the orthodoxy in Japan – at least at the central banks – has been the reverse: that deflation is a “real economy” phenomenon, essentially beyond the reach of monetary policy to fix.

Full text


Top of page

The case for helicopter money
I fail to see any moral force to the idea that fiat money should only promote private spending
Martin Wolf, Financial Times 12 February 2013

When arguing that monetary policy is already too loose, critics point to exceptionally low interest rates and the expansion of central bank balance sheets. Yet Milton Friedman himself, doyen of postwar monetary economists, argued that the quantity of money alone matters.

Measures of broad money have stagnated since the crisis began, despite ultra-low interest rates and rapid growth in the balance sheets of central banks,

Under fiat (that is, government-made) money the supply of reserves is potentially infinite.

True, central banks can pretend reserves are limited. In practice, however, central banks will advance reserves without limit to any solvent bank (and, as we have seen, to insolvent ones).

With central banks able to supply reserves at will, the constraints on lending are solvency and profitability. Expanding banking reserves is an ineffective way to increase lending, not a dangerous one.

Read more here

Mer än 95 procent av alla pengar skapas i och av privata banker.
Pengaskapandet sker när banker beviljar lån.
Andreas Cervenka, SvD Näringsliv 2 september 2012

Money is a system of abstract tokens that complex societies use to manage the distribution of goods and services, and that’s all it is.
Money can consist of lumps of precious metal, pieces of paper decorated with the faces of dead politicians, digits in computer memory, or any number of other things, up to and including the sheer make-believe that underlies derivatives and the like.
John Michael Greer, January 22, 2013

Money and Credit – There Is A Difference
The Link between Money and Credit in the Fractionally Reserved Banking System
Pater Tenebrarum, December 18th, 2010

Their biggest fear following the denouement was a repeat of the interbank funding crisis that triggered all the manic activity by the Fed and ECB (beginning in late 2007 already), which were providing an alphabet soup of 'emergency lending facilities' for banks and other large financial players alike, that had all stopped trusting each other. The banks certainly don't like to have to rely on emergency funding by the Fed if they can avoid it. After all, you never know who will and who won't be bailed out (cue: Lehman).

Full text

Början på sidan - Top of page

Central Bank's monetary policy was not the primary cause of
the persistant decline in inflation and long-term interest rates

Alan Greenspan, The Age of Turbulence, p. 14

Our knowledge about many of the important linkages is far from complete
and in all likelihood will always remain so.

Monetary Policy under Uncertainty,
Alan Greenspan, Jackson Hole, August 29, 2003

"Despite the extensive efforts to capture and quantify these key macroeconomic relationships, our knowledge about many of the important linkages is far from complete and in all likelihood will always remain so. Every model, no matter how detailed or how well designed conceptually and empirically, is a vastly simplified representation of the world that we experience with all its intricacies on a day-to-day basis. Consequently, even with large advances in computational capabilities and greater comprehension of economic linkages, our knowledge base is barely able to keep pace with the ever-increasing complexity of our global economy."

Full text

Monetary Policy under Uncertainty
Ben S. Bernanke, October 19, 2007
Början på sidan - Top of page

The Death of Paper Money
As they prepare for holiday reading in Tuscany, City bankers are buying up rare copies of an obscure book on the mechanics of Weimar inflation published in 1974.
Ambrose Evans-Pritchard, 25 Jul 2010

Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699 (shipping free.. thanks a lot).

The crucial passage comes in Chapter 17 entitled "Velocity".

Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised

As a signed-up member of the deflation camp, I think the Bank and the Fed are right to keep their nerve and delay the withdrawal of stimulus -- though that case is easier to make in the US where core inflation has dropped to the lowest since the mid 1960s. But fact that O Parsson’s book is suddenly in demand in elite banking circles is itself a sign of the sort of behavioral change that can become self-fulfilling

As it happens, another book from the 1970s entitled "When Money Dies: the Nightmare of The Weimar Hyper-Inflation" has just been reprinted. Written by former Tory MEP Adam Fergusson -- endorsed by Warren Buffett as a must-read -- it is a vivid account drawn from the diaries of those who lived through the turmoil in Germany, Austria, and Hungary as the empires were broken up.

Full text

The US money supply has experienced the sharpest contraction in modern history
"Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist.
Mish/Ambrose Evans-Pritchard, August 19, 2008

The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.

Full text

Today we tackle an economic concept called the velocity of money
Is the Money Supply Growing or Not?
John Mauldin, April 25 2008

Let's start with a few charts showing the recent and high growth in the money supply that many are alarmed about.

The money supply is growing very slowly, alarmingly fast or just about right, depending upon which monetary measure you use.

Full text

Top of page

In a short series of briefs we will analyze how single minded monetary policies and misguided micro oriented risk management created today’s financial markets’ mess.
The first brief argues that any simple minded, explicit and specific targeting procedure is bound to fail at some point since these are always too restrictive for the complexity of the macro economy.
Casper de Vries, Erasmus University Rotterdam, Eurointelligence, 11/2 2008

Many central banks currently operate under some form of inflation targeting. Monetary policy makers believed they had found the alchemist recipe for gold, as this latest fashion in central plan banking went hand in hand with years of low inflation. Suddenly there is this wake up call from financial markets and central bankers stand ready with liquidity. Are such infusions a logical consequence of this newest operating procedure, or is something else at stake?

History is rife with different targeting procedures, considering that the following targets have been used as intermediate goals towards reaching a central bank’s final objective: Money, domestic credit, exchange rate, nominal income and the interest rate. The Bank of England at least paid lip service to each of these targets at some point during the past fifty years.

Full text

In September 1992 the matter was decided for government by the markets.
The pound was bounced out of the ERM, but not till after a desparate last ditch battle, which cost the country still untold millions of pounds and the business community an undocumented number of heart attacks and near-suicides. The day after the chancellor was singing in his bath, a few weeks on the British economy began to improve and in 1993 Norman Lamont left the government, clearly the intended scapegoat.
WILLIAM (Bill) CASH about Norman Lamont's book "Sovereign Britain".

Kronkursförsvaret 1992
Dom var inte ondskefulla, men deras inkompetens var förfärande

Läs mer här

Top of page

Fed's interest-rate cuts may be a quick fix for 2008,
but they'll create a massive inflationary push in 2009,
leading us right back into another boom-bust cycle.
Jim Jubak, CNBC 5/2 2008

At the consumer level, headline inflation, which includes energy and food prices, hit a 17-year high in 2007 as the Consumer Price Index climbed 4.1%.
That's way above the Fed's 2% inflation target.
The core inflation rate, which excludes food and energy prices, climbed 2.4%, also above the Fed's target.

Full text


The chance of an inflation shock may be higher than you think
Dan McCrum FT Alphaville 13 August 2018

Peter Berezin, Chief Global Strategist for BCA Research revisited the 1970s for lessons relevant to today, and finds that some common assumptions about the decade are wrong.

For instance, US inflation actually got going in 1966, long before the Bretton-Woods system of fixed exchange rates collapsed in 1971, and the oil cartel Opec prompted an oil price shock two years later.

Full text

Next Bubble U.S. Government Bonds

Top of page

Why am I not worried about an inflationary spike? Because monetary variables tell me so.
Lars Christensen 16 April 2018

Full text

Critics say the Fed is relying on a broken model and pays no attention to broad money data,
preferring backward-looking indicators such as unemployment and wage growth.
Ambrose Evans-Pritchard, 3 April 2018

This ‘New Keynesian’ outlook led to a series of mistakes in 2008
when it ignored red alert warnings from the monetary aggregates and allowed the incipient financial crisis to metastasize.

Full text

Top of page

If foreigners use their dollars to build a factory in, say, South Carolina, our real economy gets a boost that neutralizes the circular flow’s leak. But if they only buy stocks and bonds in our financial economy, that shouldn’t provide as much of an offset to the leak.

Well, data show the foreign sector mostly draining dollars from our real economy and then investing them in our financial economy

In the past, I used the name “MDuh” for bank-created money, the measure Friedman and Schwartz studied, not the measures they popularized
For this article, though, I’ll use “M63,” referring to the year they published their work.

Top of page

A rate rise this month — to which investors still ascribe a low probability — would be a serious mistake.
The risk is not just a sudden jolt to financial markets around the world.
An increase in borrowing costs now would also confirm suspicions that the Fed is working with substantially the wrong model of monetary policy in mind
FT editorial 9 September 2016

Lack of NGDP growth is the real reason for Italy’s banking crisis
The Market Monetarist, 7 July 2016

Ambrose via The Market Monetarist

The primary purpose of doing QE is — or should be — to expand purchasing power
John Greenwood, FT 30 May 2016

Full text

Money is TIGHT
We hear it all the time – central banks are printing money like no time before and
it is not working and now there is nothing more central banks around the world can do to fight deflation.
However, this is all a myth and this is what I will demonstrate in this post by looking at global money base growth.
The Market Monetarist 15 May 2016

Full text

Janet Yellen

Donald Trump Is Right: Deficits Don’t Matter.
Sounds a lot like Modern Monetary Theory (MMT)
New Republic 11 May 2016

Modern Monetary Theory (MMT)

Top of page

Since we commonly understand why lowering interest rates stimulates debt and economic growth,
and less commonly understand how QE works, I’d like to explain it.
Ray Dalio, founder and head of hedge fund group Bridgewater, FT 25 January 2015

Andreas Cervenka om Stephen Williamson och Hayek
Världsekonomins medicin sedan 2008 fungerar inte
Augusti 2015

Syntesen av Hayek, Friedman och Keynes,
mitt storhetsvansinniga och föga framgångsrika projekt
Rolf Englund 7 augusti 2015

Banks are Not Intermediaries of Loanable Funds – and Why This Matters
Yves Smith, June 19, 2015

Yves here. Over the years, we’ve regularly criticized economists like Bernanke and Krugman, who rely on the so-called loanable funds model, which sees banks as conduits of funds from savers to borrowers.

Despite the fact that many central banks, such as the Bank of England, have stressed that that’s not how banks actually work
(banks create loans, which then produce the related deposit), central banks still cling to their hoary old framework.
For instance, when I saw Janet Yellen speak at an Institute of New Economic Thinking conference in May,
she cringe-makingly mentioned how banks channel scarce savings to investments.

Even worse, the macroeconomic models used by central banks incorporate the loanable funds point of view.
This article describes what happens when you use a more realistic model of the financial system.
Even though the paper is a bit stuffy, the results are clear:
economies aren’t self-correcting as the traditional view would have you believe
but have boom/bust cycles (the term of art is “procyclical”) and banks show the effects of policy changes much more rapidly.

Full text

Top of page


Bonds beware as money catches fire in the US and Europe
The broad M3 money
"Forecasters ignore broad money at their peril," says Gabriel Stein, at Oxford Economics.
A dynamic measure of eurozone M3 known as Divisia - tracked by the Bruegel Institute in Brussels - is back to growth levels last seen in 2007.
Ambrose Evans-Pritchard, 15 Apr 2015

Mr Stein said total loans in the US are now growing at a faster rate (six-month annualised) than during the five-year build-up to the Lehman crisis.
"The risk is that the Fed will have to raise rates much more quickly than the markets expect. This is what happened in 1994," he said.

That episode set off a bond rout. Yields on 10-year US Treasuries rose 260 basis points over 15 months, resetting the global price of money.
It detonated Mexico's Tequila crisis.

Full text

Next Bubble Is Forming: U.S. Government Bonds

Top of page


It is with regret and sadness we announce the death of money on November 16th 2014 in Brisbane, Australia
G20 will announce that bank deposits are just part of commercial banks’ capital structure,
and also that they are far from the most senior portion of that structure.
With deposits then subjected to a decline in nominal value following a bank failure, will some investors prefer banknotes to bank deposits?
Such a change in preference is known as a "bank run."
Russell Napier of ERIC, via zerohedge, 11 November 2014

Dragi trollar fram 850 miljarder euro - men vad säger Bundesbank och Författningsdomstolen?
ECB pumps cheap cash into the banks through the targeted long-term loan program,
which kicks in next month and which Draghi says might supply 850 billion euros ($1.1 trillion).
Next, the banks lend that cash to companies.
They then bundle the loans together into asset-backed bonds,
and sell those securities to the ECB.
Mark Gilbert, Bloomberg View 8 August 2014

One of the lessons to emerge from the 1970s and 1980s is that it is difficult to define what money is.
All those naive souls who imagined that it would be dead easy to control inflation by controlling “the money supply” were on to a loser from the start.
Hence all that tortured travel along the various monetary motorways, M1, M2, M3, M4, which led nowhere.
In practice, different assets have different degrees of “moneyness”.

Roger Bootle 11 May 2014

Top of page

Paul Krugman is puzzled why it’s suddenly news that banks have the power to create money.
As he noted on his blog this week, it’s hardly something that contradicts standing economic theory.
We have, as he notes, known about the money-creation role of banks for a long time
Izabella Kaminska, FT blog Apr 30 2014

So why then is it suddenly such a talking point?

Who is it really that’s been misunderstanding the system for so long and how much damage has this been doing?

Full text

I’ve seen a number of people touting this Bank of England paper (pdf) on how banks create money as offering some kind of radical new way of looking at the economy.
And it is a good piece. But it doesn’t seem, in any important way, to be at odds with what Tobin wrote 50 years ago (pdf)
Paul Krugman 28 April 2014

Bookmark and Share

One of the abiding truisms of economics is that growth doesn’t happen without credit expansion.
This is well explained in a recent paper by the Bank of England,
which points out that money in the modern economy is largely created by commercial banks making loans.
It is a common misconception to think that banks only lend what they can borrow from depositors.
Jeremy Warner, 24 March 2014

Money creation in the modern economy
Bank of England pdf, QB 2014 Q1

We believe strongly that monetary policy should be based on rules rather than on discretion.
But to change the wrong rules (inflation targeting) to the right rules (NGDP targeting) you need to make a discretionary decision.
The Market Monetarist 15 March 2014

Full text

Targeting the level of nominal gross domestic product - NGDP
A quiet revolution is sweeping over central banks. The past five years have led central banks to a revolutionary situation. Fed said it would keep interest rates close to zero until the US unemployment rate falls below 6.5 per cent (it is 7.7 per cent today).
For a central bank, let alone the Fed, to tie rates to the economy in this way was without precedent.
Robin Harding, Financial Times 14 december 2012

Top of page

Bookmark and Share

Deflation - A nightmare for the debt-stricken states of southern Europe, still trapped in a slump with mass unemployment
With Germany at zero inflation, they have to go into even deeper deflation to claw back lost competitiveness within EMU under "internal devaluations".
This, in turn, plays havoc with debt dynamics through the denominator effect.
Their debt loads are rising on a base of flat or contracting nominal GDP.
It is a key reason why Italy's public debt has risen from 119pc to 133pc of GDP since 2010 despite achieving a primary budget surplus
Ambrose Evans-Pritchard 12 March 2014

Mr Blanchard said their gains in competitiveness risk being overwhelmed by a rise in the "real value" of their debt.

Olivier Blanchard, the International Monetary Fund's chief economist.

Fotnot: Denominator = Nämnare (tal som står under bråkstreck) eller som man sade i skolan: Täljaren i topp, nämnaren nere

Full text

Euro Area — “Deflation” Versus “Lowflation”
March 4, 2014 by iMFdirect
Recent talk about deflation in the euro area has evoked two kinds of reactions.
On one side are those who worry about the associated prospect of prolonged recession.
On the other are those who see the risk as overblown.
This blog and the video below sift through both sides of the debate

Full text


Top of page

Bookmark and Share

Is there an inflation bubble?
For five years, two of the country’s leading economists have disagreed over whether billions of pounds of quantitative easing
will lead to uncontrolled inflation or a deflationary spiral.
Here Liam Halligan and Professor Tim Congdon try to settle their differences
Telegraph, 15 Feb 2014

Full text

Top of page

Bookmark and Share

MZM verkar vara gamla kära M1 eller M2 -

No, the Fed doesn’t have a helicopter, why do you ask?
The growth of the money supply has actually slowed since the adoption of QE3.
In a $16 trillion economy, $1 trillion would be if that money were in circulation in the economy.
But most (if not all) of that money remains outside the economy, parked at the Fed
Rex Nutting, MarketWatch 14 February 2014

Yes, the Fed has conjured about $1 trillion in the past year to buy super-safe Treasury and mortgage-backed bonds from the private sector
in a bid to force investors to put their money into riskier investments that will help the economy grow a bit faster.

But most (if not all) of that money remains outside the economy, parked at the Fed in what are known as bank reserves.
The fact that bank reserves increased in 2013 by about $900 billion to about $2.5 trillion is often seen as a failure of the Fed’s quantitative-easing program,
because it shows that banks did not lend out their excess reserves.

(The topic of how bank reserves work is far too complicated for one column.
Interested readers can start with this paper by Paul Sheard of Standard & Poor’s: “Repeat After Me: Banks Cannot and Do Not ‘Lend Out’ Reserves” or with this paper,
“Why Are Banks Holding So Many Excess Reserves?” by a couple of New York Fed economists.)

Bernanke was tagged with the mocking nickname “Helicopter Ben” after he spoke of his certainty that, in a paper-money system, a “determined government” could always prevent deflation from occurring, even if it meant having to drop cash out of a helicopter to inflate the money supply.

The Fed doesn’t have a helicopter or its equivalent. It can’t drop cash out of the sky. Only the federal government can do that.
Helicopters are a tool of fiscal policy, not monetary policy.

Full text

Should there be another round of QE/helicopters, we must surely find a better way to inject the money.
Today’s method is enriching the uber-elites, with a painfully slow trickledown.
The better alternative is to stick the needle straight into the veins of the economy
- building roads, railways or nuclear power stations.
Ambrose 29 May 2013 with nice pic of Fed

Rolf Englund blog 5 december 2009:
Jag tycker det är skriande uppenbart att räntan världen över är för låg och att en större del av stimulanserna borde ske via finanspolitiken.
Men väljarna och därmed deras medlöpande politiker är rädda för budgetunderskott och vill hellre att villaägarna skall låna än att staten skall göra det.
Strategin synes vara att det gäller att stabilisera, helst höja, villapriserna så att konsumenterna främst i USA skall återgå till att konsumera med lånta pengar, dvs just det som ledde fram till katastrofen.
Full text

Top of page

A long time ago, the debate between monetarists and Keynesians was the debate in macro.
But it was a rather limited debate: both sides generally used the same model (IS-LM), and so it was all about parameter values.
More recently, but before the recession, that debate had largely gone away, but since then it seems to have come back.
This post asks why that is.
Simon Wren-Lewis, an economics professor at Oxford University, and a fellow of Merton College, 6 January 2014

Before the recession, what I have called the consensus view was this.
Under flexible exchange rates, monetary policy was the instrument of choice for demand stabilisation.
Textbooks tend to give you a list of reasons why this is, but as I and colleagues argue here, it follows naturally in a New Keynesian model. It is not because fiscal policy cannot stabilise demand, but because (in fairly simple cases) monetary policy is better at doing so.

Full text

Top of page

Nobel laureate Christopher Pissarides earlier this week gave a lecture at the London School of Economics on the theme “Is Europe Working?”.
It is an extremely interesting lecture. I disagree with a lot of what professor Pissarides is saying. He focuses far too much on fiscal policy issues and far to little on monetary policy.
But it is in general a very enlightened lecture and he raises a number of extremely important questions about the future of the euro zone.
The Market Monetarist, 13 december 2013

Listen to Professors Pissarides’ excellent lecture here (I say this despite the fact he says in the end of lecture that he “was born a Keynesian and will die a Keynesian”)

PS I now know how uncomfortable Gustav Cassel must have felt agreeing more with Keynes than Hayek on the causes of and the solutions to the Great Depression.

PPS maybe the euro zone’s real problem is that European economists are all either Keynesians or Austrians (or should I say “Germans”?) Where are the European monetarists? And Market Monetarists?

Full text

One of the world’s leading economists will today admit he was wrong to back the creation of the euro – and call for it to be dismantled.
Sir Christopher Pissarides, who won the Nobel Prize for economics in 2010, was once a passionate believer in the benefits of the single currency.
But in an extraordinary change of heart, today he will warn the euro is creating a ‘lost generation’ of unemployed youngsters and is ‘dividing Europe’.
Daily Mail 12 December 2013

Top of page

My trips to Sweden have once again reminded me about the dangers of conducting monetary policy with interest rates at the Zero Lower Bound (ZLB).
Lets say we can describe monetary policy with a simple Taylor rule:
r = rN+a*(p-pT)+b(ygap)
The Market Monetarist, 26 November 2013

Growth rates have remained stubbornly low and unemployment rates unacceptably high,
partly because the increase in money supply following QE has not led to credit creation to finance private consumption or investment.
Nouriel Roubini, Project Syndicate, 31 October 2013

Lysande och pedagogisk
Too much state-created money is by definition a bad thing. And so is too little.
But how do we know how much is too much and how much too little?
It is a pity that the central banks decided to use the ugly term quantitative easing for what they were doing.
If they had called them “extended open-market operations”, or something similar, they would have had less explaining to do.
Samuel Brittan, Financial Times, October 31, 2013

More silliness from the tin foil hat Austrians
The Market Monetarist, Lars Christensen 19 October 2013

I love reading the normally good blog posts on written by clever economists such as George Selgin and Kurt Schuler.
However, the Facebook page of very often fails to live up to the same good standards as the blog. In fact most updates are what I consider to be internet-Austrian nonsense.

The freebanking facebook page is quoting an article by Lawrence J. Fedewa. I have never heard about him before, but his article is a pretty good example of the kind of "the-world-is-coming-to-an-end" nonsense,
which is floating around in cyberspace mostly written by tin foil hat Austrians.

Full text

Top of page

As you may have seen, Japan’s public debt has hit one trillion quadrillion yen.
That is roughly $10 trillion. It will reach 247pc of GDP this year (IMF data).
No problem. Where there is a will, there is a solution to almost everything.
Let the Bank of Japan buy a nice fat chunk of this debt, heap the certificates in a pile on Nichigin Dori St in Tokyo, and set fire to it.
That part of the debt will simply disappear.
You could do it as an electronic accounting adjustment in ten seconds.
Ambrose Evans-Pritchard, August 9th, 2013

Or if you want preserve appearances, you could switch the debt into zero-coupon bonds with a maturity of eternity, and leave them in a drawer for Martians to discover when Mankind is long gone.

Full text


Fed’s policymakers want prices to go up because they believe that a little bit of inflation is good for growth.
The Fed wants interest rates to be below the rate of inflation to give homeowners
and businesses a strong incentive to borrow and spend, generating jobs.
The Fed can’t do that if there’s no inflation because interest rates can’t be lower than zero.

Bloomberg, 1 May 2013

Full text

The death of inflation
Central banks in the rich world may have been too successful in subduing price pressures

The Economist, April 13th 2013, print

Full text

Two flaws exist in the belief that the Fed can create rising aggregate demand.
First, they do not directly control M2. Second, velocity is almost entirely outside their control.
In order to understand how these two variables prevent the Fed from increasing aggregate demand,
it is necessary to become conversant with a few terms: monetary base, bank reserves, and money multiplier.

Hoisington Investment Management – Quarterly Review and Outlook, First Quarter 2013
via John Mauldin

Not only does the Fed not control money, but it cannot determine velocity (V), the speed that money turns over, either.
The great American economist, Irving Fisher, identified this connectivity between money and economic growth with a straightforward formula:
Nominal GDP equals money (as defined by M2) times its turnover (GDP=MV).

Full text

Top of page

Presentation by Norges Bank governor
Have a look at the graph on slide 17 of the presentation.
The graph shows nominal GDP for what is called mainland Norway (“Fastlands-Norge”)
which is the non-oil part of the Norwegian economy.

The Market Monetarist 21 February 2013

Related posts:
Denmark and Norway were the PIIGS of the Scandinavian Currency Union
Danish and Norwegian monetary policy failure in 1920s – lessons for today
Fear-of-floating, misallocation and the law of comparative advantages

Full text

Top of page

Money is a system of abstract tokens that complex societies use to manage the distribution of goods and services, and that’s all it is.
Money can consist of lumps of precious metal, pieces of paper decorated with the faces of dead politicians, digits in computer memory, or any number of other things, up to and including the sheer make-believe that underlies derivatives and the like.
John Michael Greer, January 22, 2013

Important differences separate these various forms of money, depending on the ease or lack of same with which they can be manufactured, but everything that counts as money has one thing in common – it has only one of the two kinds of economic value, use value and exchange value

All forms of real wealth – that is, all nonfinancial goods and services – have use value as well as exchange value. They can be exchanged for other goods and services, financial or otherwise, but they also provide some direct benefit to the person who is able to obtain them. All forms of money, by contrast, have exchange value but no use value. You can’t do a thing with them except trade them for something that has use value (or for some other kind of money that can be traded for things with use value).

For the last three hundred years, as industrial society emerged from older socioeconomic forms and became adept at finding ways to use the immense economic windfall provided by fossil fuel energy, there have been two principal brakes on economic growth.

Full text

The question is:
Is higher inflation the most painless way to escape current economic troubles?
The Economist, by invitation, October 2012

Read it here

Top of page

It is very clear that had it not been for the utterly damaging effects of the gold standard
on Germany’s economic and social well-being then Hitler and his Nazi party would never have gotten to power in 1933.

The Market Monetarist, 14 December 2012
Highly Recommended

So while the UK and the USA started to move out of the crisis and started economic and social recovery the result was nonetheless that both countries got dragged into a World War. I am not saying that that will happen again, but I certainly see the same commitment in continental Europe today to failed monetary policies as was the case in 1930s.

Dear Mario Draghi here is a few blog posts on 1930s economic and monetary history:

1931: The Tragic year: 1931
Germany 1931, Argentina 2001 – Greece 2011?
Brüning (1931) and Papandreou (2011)
Lorenzo on Tooze – and a bit on 1931
“Meantime people wrangle about fiscal remedies”
“Incredible Europeans” have learned nothing from history
The Hoover (Merkel/Sarkozy) Moratorium
80 years on – here we go again…
“Our Monetary ills Laid to Puritanism”
Monetary policy and banking crisis – lessons from the Great Depression
1932: .....

Full text

EMU Replay of the 30´s

Utan bindningen av pundkursen kanske Hitler i stället hade fortsatt som konstnär.

Top of page

Monetarists from across the world can mostly agree on one thing.
The US Federal Reserve caused the Great Recession.
The "Bernanke Depression" if you want, a term gaining traction in elite circles.
Ambrose Evans-Pritchard, 23 September 2012

The indictment is a little unfair. The European Central Bank was worse. It raised rates into a deflationary oil shock in August 2008, and worsened a run on the dollar that constrained Fed actions.

There was little that Bernanke could do about the deeper causes of the crisis, whether the `Savings Glut' of Asia and North Europe, the `China Effect', the $10 trillion reserve accumulation by the world's rising powers.

Yet three heavyweight books now lay the blame squarely on the Fed: the 'Great Recession' by Robert Hetzel, a top insider at the Richmond Fed; 'Money in a Free Society' by Tim Congdon from International Monetary Research; and 'Boom and Bust Banking: The Causes and Cures of the Great Recession' by David Beckworth from Western Kentucky University.

Full text


Top of page

Come on Bernanke, fire up the helicopter engines
Samuel Brittan, Financial Times, August 30, 2012

Quite why gold bugs think that the Gold Standard prevents asset bubbles and excess debt is beyond me. The 1920s saw US debt levels surge to around 300pc to 350pc of GDP.
It is very similar to what occurred in our own Noughties up to 2008.
As Paul Krugman says, Europe has replicated the worst features of interwar Gold with monetary union.
Ambrose Evans-Pritchard, August 29th, 2012

Folk är vana vid att man måste arbeta för att få pengar.

Dom, och tydligen många som anses lärda, har inte tagit till sig att man, om man är en riksbank, kan skapa pengar genom att skriva en summa på datorn och sedan trycka enter.
Konsten är, som vi monetarister brukar säga, att skapa lagom mycket pengar.
Inte för mycket, då blir det inflation,
Inte för lite, då blir det massarbetslöshet
Läs mer här

Tea Party
In her parting shot on leaving the State Department, Hillary Clinton said of her Republican critics,
“They just will not live in an evidence-based world.”
Paul Krugman, Herald Tribune 10 February 10, 2013

Last week Eric Cantor, the House majority leader, gave what his office told us would be a major policy speech. And we should be grateful for the heads-up about the speech’s majorness.

Otherwise, a read of the speech might have suggested that he was offering nothing more than a meager, warmed-over selection of stale ideas.

The truth is that America’s partisan divide runs much deeper than even pessimists are usually willing to admit; the parties aren’t just divided on values and policy views, they’re divided over epistemology.

One side believes, at least in principle, in letting its policy views be shaped by facts; the other believes in suppressing the facts if they contradict its fixed beliefs.

Full text

"The Great Recession: Market Failure or Policy Failure?" by Robert Hetzel
A fresh US slump is not just a risk any longer. It has already begun.
Bernanke was not paying full attention because he disdains the quantity of money theory of Milton Friedman and countless others before him - including Keynes - as hocus pocus.
Yet the moneratists were right. They saw the steam engine coming straight down the tracks.
Ambrose 15 July 2012

The Federal Reserve has drifted into fatalism, seeming to lose confidence in its own ability to shape events, displaying the same lack of "Rooseveltian resolve" as the Fed in the early 1930s -- to borrow an expression written years ago by a young Princeton professor, and Fed scourge, called Ben Bernanke.

It is worth reading "The Great Recession: Market Failure or Policy Failure?" by Robert Hetzel from the Richmond Fed, the most damning critique ever published by a serving insider.

Bernanke has bought most of the bonds from the banking system. This is a bad way to boost the broad M3 money supply. You have to go outside the banks to gain traction, buying from pension funds, life insurers, and the general public. Don't say QE has failed in the US. It has hardly been tried.

Market monetarists around the world argue that central banks can always fight off slumps, whatever is thrown at them. But to do so policy-makers must stop targeting inflation -- the wrong variable, indeed a particularly bad variable -- and instead deploy nuclear force to drive up nominal GDP to a trend line growth rate of 5pc, doing so transparently so that markets know exactly what the objective is and when the stimulus will be unwound.

I have no doubt that this would bring about a full recovery very fast if conducted with enough panache, but is it possible to marshal political consent for such revolutionary action?

The Tea Party Congress, like Europe's bourgeousie, would rather wallow in liquidation, Puritan cleansing, and mass default than tolerate the possibility of a solution.

Full text

Top of page


On the other hand, there is people who argue that
As every effort to re-inflate and perpetuate the credit bubble is made,
the words of Austrian economist Ludwig Von Mises lurk ominously nearby:
Peak Prosperity, 10 July 2012

Clearly the sugar rush from the ECB's 3-year credit blitz has worn off, leaving behind some very toxic effects.
Why anybody thought that a €1 trillion liquidity blitz through the banks is better than €1 trillion in genuine QE is beyond me.
Ambrose Evans-Pritchard, 30 May 2012

Those banks in Italy and Spain that used the money to play the Sarkozy redemption trade by purchasing sovereign debt – some with ten times leverage – are in serious trouble.

I think the ECB has twisted itself in knots to comply with a dysfunctional mandate, enshrined in the dysfunctional Maastricht treaty.
One error begets another.

Full text


Top of page

Mario Draghi’s latest half-trillion blast of credit averts a funding crunch for crippled banks and crippled EMU states,
but raises the ultimate cost to catastrophic levels if the underlying crisis in southern Europe drags on into the middle of the decade.

Mr Draghi has won high praise from monetarists around the world,
convinced that he has acted just in time to head off a dangerous contraction of the money supply and a full-blown banking disaster.
"Draghi has been very astute, and has given the single currency project another lease of life,"
said Professor Tim Congdon from International Monetary Research.
Ambrose Evans-Pritchard, 29 Feb 2012

Full text

Something is changing in policy doctrine.
After a couple of decades in which the money supply almost disappeared from view it is now coming back
A new paper by Tim Congdon
Samuel Brittan, Financial Times 14/10 2005

Top of page

”De stabila bolagen med hög kreditvärdighet är vältrimmade, effektiva och entreprenöriella.
Bara i USA sitter bolagen på 2.000 miljarder dollar i kontanter.
Om deras tillförsikt förbättras skulle de kunna använda pengarna till investeringar, nyanställningar och bolagsköp.”
Nouriel Roubini, DI 17 oktober 2011


För att betala kalaset skapar den schweiziska centralbanken nya digitala pengar. På en enda månad mer än fördubblades mängden centralbanksfranc, den monetära basen på fikonspråk.
Tidningen Financial Times konstaterade att det är en penningproduktion som till och med hade gjort centralbankschefen i tyska Weimarrepubliken avundsjuk.
Där slutade det med hyperinflation och kollaps 1923.
Andreas Cervenka, SvD Näringsliv 17 okt 2011

Början på sidan


Is monetary policy too expansionary or not expansionary enough?
Martin Wolf blog June 27, 2010

Why it is right for central banks to keep printing
Martin Wolf, FT June 22 2010

The number of unemployed Americans fell by 350,000 - and the unemployment rate fell to 9.5 per cent.
But consider that this was mainly due to a reduction in the civilian labour force of 652,000 workers.
FT blog Moneysupply July 2, 2010

Marianne Nessén, doktor i ekonomi och biträdande chef för avdelningen för penningpolitik på Sveriges Riksbank
- Hur mycket pengar det finns i Sverige? Det är omöjligt att svara på
Hur mycket sedlar och mynt som finns vet vi förstås, det handlar om ungefär hundra miljarder kronor.
Men om vi pratar om pengar i vid mening är begreppet otroligt fluffigt och flexibelt. Jag kan inte sätta en siffra på det, säger hon.
Andreas Cervenka, SvD Näringsliv 2 okt 2011

Riksbanken besitter den mycket speciella förmågan att skapa pengar.

Runt ett långsmalt bord täckt av skärmar sitter en handfull personer. De övervakar betalningssystemet Rix, som är själva blodomloppet i finanskroppen.

Under krisen skapade Riksbanken pengar genom att i flera omgångar låna ut flera hundra miljarder kronor till de svenska bankerna. De fick lämna in värdepapper, till exempel obligationer, som säkerheter. Sedan satte Riksbanken in pengar som hamnade på bankernas konto i Rix.

Men hur går det egentligen till?

– Såhär, säger Per Kvarnström och knäpper med fingrarna i luften.

Full text

Top of page


Vanliga medeklassmänniskor i Sverige har gjort mångmiljonaffärer på bostadsmarknaden med en belåning på 90 procent eller mer,
en nivå som skulle få vilken solbränd riskkapitalist som helst att skrika rätt ut av ångest.
Andreas Cervenka, SvD Näringsliv 2 okt 2011

Cantillon, en irländsk ekonom, bankir och börsspekulant på 1700-talet, var först med att poängtera att
effekten av penningpolitiken beror på de kanaler genom vilka nya pengar pumpas in i samhällsekonomin,
på vem som får pengarna och vad de används till.
Lars Jonung Kolumn DN 2009-12-17

Top of page

En del av uppgången i inflationen under 2007–2008 berodde inte bara på högre oljepriser
utan även på en monetärinflation, skapad av Riksbankens expansiva penningpolitik.
Det var därför som Riksbanken höjde räntan från 4,00 procent till 4,75 procent under 2008.
Fredrik NG Andersson, SvD Brännpunkt 2009-02-13
Doktor i Nationalekonomi vid Lunds Universitet

Vad är då problemet idag? Jo, Riksbanken fullföljde aldrig sin åtstramningspolitik och det höga underliggande monetära inflationstrycket finns därför kvar.

En av de genom historien mest pålitliga långsiktiga inflationsindikatorerna är tillväxttakten i penningmängden. Internationell forskning, och min egen forskning, visar att det finns ett tydligt samband mellan tillväxten i mängden pengar i ekonomin och inflationstakten.

Full text

Top of page

Make Sure You Get This One Right
Are we facing a deflationary spiral or will the monetary
and fiscal stimulus ultimately create (hyper) inflation?

By Niels C. Jensen, at John Mauldin, 7/6 2009

Unfortunately, the answer is less straightforward. There is no question that, in a cash based economy, printing money (or 'quantitative easing' as it is named these days) is inflationary. But what actually happens when credit is destroyed at a faster rate than our central banks can print money?

The hedge fund industry is guilty of many stupid things over the years, but blaming it for the credit crisis is beyond pathetic and the suggestion that increased regulation of the hedge fund industry is going to prevent future crises is outrageously naïve.

We are effectively caught in a liquidity trap.
The Bank of England, the European Central Bank and the Federal Reserve have all flooded their banking system with enormous amounts of liquidity in recent months but what has happened?
Instead of providing liquidity to private and corporate borrowers as the central banks would like to see, banks have taken the opportunity to repair their balance sheets.

For quantitative easing to be inflationary it requires that the liquidity provided to the market by the central bank is put to work, i.e. lenders must lend and borrowers must borrow.
If one or the other is not playing along, then inflation will not happen.

This is illustrated in chart 3 which measures the growth in the US monetary base less the growth in M2. As you can see, the broader measure of money supply (M2) cannot keep up with the growth in the liquidity provided by the Fed. In Europe the situation is broadly similar.

Contrary to common belief, rising commodity prices can in fact be deflationary so long as demand for such commodities is relatively inelastic, which is usually the case for basic necessities such as heating oil, petrol, food, etc. The logic is the following: As commodity prices rise, money earmarked for other items goes towards meeting the higher commodity price and consumers are essentially forced to re-allocate their spending budget. This causes falling demand for discretionary items and can in extreme cases lead to deflation.
We only have to go back to 2008 for the latest example of a commodity price induced deflationary cycle.

Full text

A repeat of the Great Depression is unlikely
Deflation is the ultimate economic calamity. This is also known as the liquidity trap.
Wolfgang Munchau, FT February 11 2008

Top of page

Most rational investors accept the dual proposition that
a Fed funds rate pinned against zero and near-$800 billion of excess reserves sloshing around the banking system are not enduringly sustainable.
This is the case despite the fact that most – though a smaller most – applaud the Fed for engineering these outcomes, so as to cut off the fat tail risk of deflationary Armageddon.
Paul McCulley, June 2009

Full text

More articles by Paul McCulley at Intcom

Okay, when you become a central banker, you are taken into a back room and they do a DNA change on you.
You are henceforth and forever genetically incapable of allowing deflation on your watch.
It becomes the first and foremost thought on your mind: deflation, we can't have it.
John Mauldin 24/4 2009

Top of page

It's a bit misleading to talk about money supply,
because what money really is is roughly $2 trillion of cash and then $50 trillion in credit.
Because what do the banks do? They take deposits in and then they borrow money to leverage them up. I take my credit card and I spend with it.
I borrow against a house. I have an asset that rises, and I borrow against it.
John Mauldin 17/4 2009
Highly Recommended

If we all decided to settle and pay off everything, we couldn't do it because there is not enough cash. There would be massive asset deflation.

So we keep the system going. Now, where are we today? We are at the Great Deleveraging. We are seeing massive losses and destruction of assets, on a scale that is unprecedented. There was massive destruction of assets during the Great Depression, which caused a lot of problems, and we are seeing the same thing today. We are watching trillions simply being poofed (another technical economics term – which will drive my poor Chinese translator crazy!). We are watching people pay down their credit lines, which is one way of saying the supply of money and credit is shrinking.

This is not just in the US, but all over the world. Because when you start adding European cash-to-credit, and Japanese cash-to-credit, and Indonesian and Chinese cash-to-credit, it becomes multiple tens of trillions, and we are watching a goodly portion of that credit be vaporized. So we -- individuals and businesses -- are trying to find that $2 trillion in real cash and get some of it to pay down our debts. We are reducing that massive leveraged money supply down to some smaller number. We are hitting the Blue Screen of Death. We don't know what it is going to reset to, but we have permanently seared the psyche of the American consumer, and it is going to get reset to some lower number, about which I will speculate in a minute.

Full text

Top of page

The main object of Alistair Darling, the British chancellor, is to inject more spending power into the British economy by a mixture of tax cuts and spending increases
The most frequent objection is to ask: “Where will the money come from?”
The short answer is: the Bank of England printing works in Debden.

Samuel Brittan, Financial Times, November 20 2008

This is not just a debating reply. In a paper currency system there is no fixed pot of money, but a total influenced by human action. The most interesting information in the Bank of England’s Inflation Report is a chart on page 11 showing that the annual growth of broad money and bank credit (excluding certain financial intermediaries) slowed from about 15 per cent early in 2007 to 5 per cent in the third quarter of 2008. In that quarter alone, real money growth (that is, adjusted for inflation) was negative for the first time since the early 1980s.

The most plausible argument against a fiscal stimulus is that by the time it takes effect, the economy will be in a boom and the effect will be destabilising. This may be valid for attempts to smooth out normal business cycles, but hardly for a possibly persistent slump.

The most plausible argument against a fiscal stimulus is that by the time it takes effect, the economy will be in a boom and the effect will be destabilising. This may be valid for attempts to smooth out normal business cycles, but hardly for a possibly persistent slump.

The last resort criticism is that increases in UK spending will leak abroad into imports. Fiscal stimuli are certainly more effective if countries act together. But countries do not have to move in lock-step; and a floating exchange rate is an invaluable safety valve for a country that is seen to move a bit further.

“But could we not avoid all these arguments by relying on monetary policy to reflate the economy?” There is a special reason for an emphasis on fiscal policy. Monetary policy works by encouraging people to borrow and spend. This must mean – barring an unlikely boom in business investment or net exports – an increase in consumer indebtedness which many observers think already too high. An increase in government debt is surely less dangerous.

Full text


More by Samuel Brittan at IntCom

Top of page

The Fed’s target rate is now back at 1 per cent, where it hit bottom in 2003.
As stress in the real economy intensifies, the Fed was right to use much of its remaining firepower.
Financial Times editorial 29/10 2008

Despite running at 4.9 per cent in September, inflation is no longer a major concern

Collapsing asset values may ignite a vicious cycle of depressed demand and falling prices. Policymakers have to do everything they can to avert this very effect – which exacerbated the Great Depression of the early 1930s and sunk Japan in its lost decade in the 1990s.

Full text


Who gives a damn about inflation?
Now that the age of moderation has ended, we are returning to Phillips curve-type discussion.
rising inflation is the most painless way out of a debt crisis
Wolfgang Münchau blog 31.01.2008

To put it in monetary policy terms, the Fed is boosting the supply of money to offset the decline in velocity,
which is the amount of turnover in the money stock.
Velocity has been falling like a newspaper stock amid the panic.
For our readers who recall their economic textbooks, Irving Fisher's famous equation is MV=PT.
Wall Street Journal editorial 30/10 2008

The supply of money times the velocity of money will equal the price level (inflation) times transactions, also known as economic output.
As velocity falls, the Fed is providing more dollar liquidity to prevent a steeper decline in GDP.

There is of course a danger in this, as Mr. Bernanke may recall from 2002 and 2003. That's when the Fed last worried about deflation and it's also the last time the Fed cut the fed funds rate to 1% and kept it there for a full year through June 2004.
We have since learned that this was a terrible error and helped to fuel the housing bubble and global credit mania.

Mr. Bernanke was a Fed governor (though not yet Chairman) at the time, and he and Alan Greenspan still don't admit this was a mistake.

The larger policy point is that it is a mistake to rely on the Fed and monetary policy to do too much. Mr. Bernanke's main obligation is price stability.

And if our politicians want to avoid a deep recession, they have fiscal policy -- specifically, the economy could now use a big, immediate and permanent cut in marginal tax rates. That would help to spur incentives to invest, as well as increase money velocity. We realize this policy mix isn't popular among the Democrats who expect to inherit all federal power next week. They're still proposing to raise taxes substantially amid a recession, and their only proposed stimulus is as much as $300 billion in new spending.

Full text

Top of page

“inflationary expectations”
William White, until recently economic adviser to the Bank for International Settlements
has resisted heroically the temptation to say: “I told you so.”
Samuel Brittan, Financial Times, August 14 2008

Ingemar Bengtsson redogör helt korrekt i sitt inlägg på SvD Brännpunkt igår för skillnaden mellan inflation och förändringar i relativpriser. Men...
Stefan Ingves, riksbankchef, Irma Rosenberg, förste vice riksbankschef
SvD Brännpunkt 14/8 2008

Riksbanken bör skyndsamt ompröva sin räntepolitik och
noga analysera skillnaden mellan inflation och prisökningar.
Den akademiska diskussionen om inflationsbegreppet måste återupplivas
Ingemar Bengtsson, SvD Brännpunkt 13 augusti 2008

TMS: A Truer Money Supply?
TMS it stands for True Money Supply and it is a monetary measure based on Austrian economic principles.
Mish 14 July 2008

The Return of Inflation?
Robert J. Samuelson, June 24, 2008

We seem to be hostage to global forces. Economists Richard Berner and Joachim Fels of Morgan Stanley call this the "new inflation," because it's not easily squelched by domestic policies. Up to a point, that's true. Although the Fed influences interest rates, it doesn't own oil rigs or cornfields. Long-term price relief for oil involves switching to more-fuel-efficient vehicles and increasing worldwide, including American, oil production. Removing subsidies for corn-based ethanol would reduce food price pressures.
Still, all large inflations involve "too much money chasing too few goods," as economist Milton Friedman often noted, and this episode is no exception. The Fed's easy-money policies have global effects. Many countries peg their currencies to the dollar -- formally or informally -- and shadow Fed policies.

Full text

Top of page

If there were a Central Bank of the World its monetary policy committee would glance at today’s inflation rates and expectations of future inflation and then raise interest rates.
There is no such bank, but there is something close: the US Federal Reserve, the monetary policy of which is mirrored by many countries in the Middle East and Asia.
low Fed interest rates are contributing to global inflation.
The Fed sets interest rates for Asian countries because, explicitly or not, they manage their exchange rates against the dollar.
If US interest rates are low, countries targeting the dollar are obliged to follow, because otherwise investors will sell dollars to buy their currency.
Financial Times editorial, June 25 2008

Barclays warns of a financial storm as Federal Reserve's credibility crumbles
US central bank accused of unleashing an inflation shock that will rock financial markets
Ambrose Evans-Pritchard, Daily Telegraph 27/6 2008

Top of page

How imbalances led to credit crunch and inflation
Martin Wolf, Financial Times, June 17, 2008

Top of page

Bernanke believes that the danger of a “substantial downturn” in the US economy has abated over the past month,
but that inflation risks are increasing.
FT June 10 2008

"Inflationen oroar mig eftersom ingen talar om den"
Göran Persson varnade för att Sveriges och många europeiska länders allt för "avslappnade inställning" till inflationen.
DI 2008-05-15

The measured savings rate out of disposable income fell to 2 percent
from its long-run average of 8 percent.

Just 2 percent of U.S. disposable income is $200 billion.
John H. Makin, April 30, 2008

The Inflation Solution to the Housing Mess
John Makin, Wall Street Journal April 14, 2008
via Tim Iacono

The policy alternatives in the post-housing-bubble world are painfully unpleasant. In my view, the least bad option is for the Federal Reserve to print money to help stabilize housing prices and financial markets. Yes, use reflation to soften the pain for Main Street and Wall Street. If instead we let housing prices fall another 25%-30% – as predicted by the Case-Shiller Home Price Index – it's almost certain that Washington will end up nationalizing the mortgage business.

While there is a substantial risk that inflation may rise for a time – this would be the policy goal – monetization is more easily reversible than nationalization of the mortgage market. Meanwhile, Fed officials concerned about inflation should rethink their view that it is impossible to identify an asset bubble before it bursts.

Full text

Top of page

Riksbanken får beröm för att dom ljög
The International Monetary Fund last week gave central banks some wicked advice.
They should no longer ignore residential property prices when setting interest rates.
At the same time, the IMF recommends central banks should retain their inflation-targeting frameworks.
It all sounds very plausible. Unfortunately the two goals are inconsistent.
Wolfgang Münchau Financial Times April 6 2008

Who gives a damn about inflation?
Now that the age of moderation has ended, we are returning to Phillips curve-type discussion.
rising inflation is the most painless way out of a debt crisis
Wolfgang Münchau blog 31.01.2008

US headline inflation runs at over 4 per cent, and if you take the old pre-Boskin inflation measure, US inflation would be over 7 per cent.
(This is the inflation measure used during the Clinton era).

The Boskin Commission report introduced the principle of hedonic pricing, i.e. prices per utility consumed, so that technical progress at constant nominal prices enters into the index as a fall in prices. If you distrust such adjustments, as I do, you could in fact argue that reckless monetary expansion not only caused asset prices inflation, but also actual inflation.

The only argument one can make, and which the Fed is making, is that you can temporarily deviate from an inflation target to pursue other goals, as long as this deviation is temporary, and as long as you retain credibility.

One question I am asking myself - and I am not generally a conspiracy theorist - is whether the Fed reluctantly accepts the rise in inflation,
or whether a rise in inflation is actively pursued.

In a country with a negative savings rate, there is not going to be much opposition from bondholders,
and rising inflation is the most painless way out of a debt crisis

Full text

The consumer price index - CPI

Real interest rates


Top of page

Är det början till slutet på en gyllene global låginflationsperiod som vi nu bevittnar?
Ragnar Roos, signerat 18/1 2008

Sedan slutet av 1990-talet och en lång rad år framåt kunde världen njuta av ett osannolikt lågt inflationstryck. Inflationshotet var plötsligt mer avlägset än vad någon centralbankschef kunnat drömma om.

Att klara en låg inflation under de omständigheter som rått under det senaste decenniet har inte varit någon oöverstiglig uppgift för centralbankerna. Problemet har ofta varit det motsatta - att pressa upp inflationen som tidvis hotat att vändas i sin motsats - deflation.

På kort tid mer än fördubblades den globala arbetsstyrka som arbetade på en konkurrensutsatt marknad. Från Berlinmurens fall 1989 fram till 2005 ökade den från 300 till 800 miljoner. Det höll tillbaka pris- och löneökningar världen över. Kina har bidragit mest till denna desinflatoriska trend.
Vid någon tidpunkt kommer en vändning. När låglönearbetare strömmar till i en långsammare takt från risfälten, börjar också prispressen att avta.
Alan Greenspan, förre chefen för den amerikanska centralbanken, Fed, spekulerar i sina memoarer "Turbulensens tid" om när denna vändpunkt kan komma.

Full text

Krugman on monetary transmission channels
My guess remains that the US and UK will try to inflate themselves out of their troubles.
Wolfgang Munchau (Portal)

Should wealth-holders (both foreign and domestic) come to doubt the determination of the Federal Reserve to preserve the dollar’s domestic purchasing power, they might dump it, with devastating effects on its external value, long-term US interest rates and the US economy.

When wealth-holders look at the scale of indebtedness in the US, they might conclude that the Fed is indeed going to be under vast pressure to choose inflation.
Financial Times editorial 27/12 2007

Full text


US Dollar

Top of page

The Fed has lost control of the money supply, because the banks it regulates no longer are the primary movers of debt creation.
From 1990 until the spring of this year, we saw the development of what Paul McCulley calls the shadow banking system.
Non-depository institutions and funds created massive amounts of new money based on leverage.
John Mauldin 2007-12-14

The obsession with M-2 or M-3 makes for good newsletter copy, but what do such broad aggregates mean in a world where new forms of money (SWAPs, derivatives, mortgages bonds, etc) appear every day?
The implication is that the old linear relationships between money supply (as measured by some arbitrary and outdated statistic like M-2) and inflation may no longer be valid.

John Mauldin 2007-12-14

My personal inflation expectations have gone up from something "close to, but above" 2 per cent to about 3 per cent
The first, and most important reason is that the ECB is not a true price stability advocate, but a central bank whose first priority is financial stability.
Wolfgang Münchau, Eurointelligence 5/12 2007

Financial companies' losses due to the US sub-prime crisis could be as much as $400bn
Goldman's chief economist Jan Hatzius predicts leveraged investors may have to reduce their lending by $2 trillion as a result.
"The macroeconomic consequences could be quite dramatic,"
Mr Hatzius said.

BBC 16/11 2007

Central banks should prick asset bubbles
Paul De Grauwe, FT November 1 2007

Deflation – not a monetary phenomenon
Unlike most economists, we at Cornerstone do not view deflation from a monetary standpoint.
This, we believe, is the mistake both Wall Street and the Fed are making.
Instead, we look at it from a businessman’s perspective.
John Riley, 03/12 2007

The US subprime lending fiasco and its repercussions on Northern Rock have brought back questions about the banking system
- questions such as “What is a bank?” and “What is money?”

Samuel Brittan, FT October 25 2007

The wolf packs are circling. Hedge funds target currency pegs
Fifteen years after George Soros smashed the sterling and lira pegs of Europe's Exchange Rate Mechanism, central banks have invited hedge funds to pounce again. This time on a global scale.
Ambrose Evans-Pritchard, Daily Telegraph 15/10/2007

The global M3 money supply is growing at 10.6pc as stimulus from America, Europe – and Japan, through the carry trade – leaks out to the vibrant parts of the world economy... With the usual lag, inflation has at last hit.

The easiest prey are in the Baltics and Balkans, where EU newcomers have let rip by importing an ECB monetary policy designed for the slow barges on the Rhine. All are overheating.
Inflation is now 11pc in Latvia, and 7pc in Estonia and Lithuania. Property prices in the capitals of all three are more expensive than Berlin. Inflation is 12pc in Bulgaria and 6pc in Romania.
The ECB has now invited the wolves to kill...... more

Tim Iacono: Good afternoon.
Alan Greenspan: Good afternoon. My assistant tells me you've been writing about me.
Iacono: A little. Let's get right to the point. Are you responsible for the housing bubble?
Greenspan: No.
Iacono: Would you care to elaborate on that?

Tim Iacono 4/10 2007

The advocates of inflation targeting have never faced
any really difficult choices - until now.

Wolfgang Münchau 03.10.2007

Over the last fifteen years, many soft-money advocates were able to jump on the inflation targeting bandwaggon. No longer did they need to declare: I’d rather have 10% inflation than 10% unemployment. They could have their cake and eat at the same time. Inflation targeting allowed them to pretend that they really did care about inflation.

Another 100bp in rate cuts, to be spread over six months, is not going to be enough to stop the recession, but it may be just enough to shift long-term inflationary expectations upwards.

Full text


The shadow banking system of hedge funds and CDOs, CLOs, PIPES, etc.
I'm sure that Bernanke, Paulson, and their cohorts understand this, but...
Bill Gross 1/10 2007

No president tried harder, with good reason, to influence the business cycle than Franklin Roosevelt.
When he took office in 1933, unemployment was roughly 25 percent. By executive order and congressional legislation, FDR effectively abandoned the gold standard, adopted deposit insurance, tried to prop up falling farm and factory prices, rescued many defaulting homeowners, regulated the stock market, and embarked on massive public works.
With what result? Well, leaving the gold standard aided recovery. But some economic research suggests that other New Deal measures may have frustrated revival. In any case, all of them together didn't end the Great Depression.
World War II did that. In 1939 unemployment was still 17 percent.

We have a $14 trillion economy. The idea that presidents can control it lies between an exaggeration and an illusion.

Robert J. Samuelson, Washington Post, February 6, 2008

Top of page

Do Not Forget About Changes in Velocity
As we never tire of pointing out, there are three things that a central bank can control:
the growth rate of its money supply, its interest rate, or the value of its currency.

Unfortunately, as the Chinese central bankers are now discovering,
it cannot control all three at the same time.
Louis-Vincent Gave, Charles Gave, Anatole Kaletsky, and company
John Mauldin, 24/9 2007

This week in Outside the Box, Louis-Vincent Gave, Charles Gave, Anatole Kaletsky, and company of GaveKal Research delve into the underlying misconceptions that presumes money velocity is and will remain constant, in the equation that says MV = PQ (Money*Velocity = Prices*Quantity) when M is increased.

It has been said that smart people learn from their mistakes (and do not repeat them) and that very smart people learn from other people's mistakes.

In 2001, when the Fed, the BoJ, the BoE and even the ECB started to dump money into the system, we gleefully assumed that either prices or activity would start to pick up over the coming quarters.
After all, hadn't Irving Fisher taught us that MV=PQ (Money*Velocity=Prices*Quantity)?
And hadn't the monetarist school shown that, over the life of a cycle, velocity was a constant? So couldn't we assume that an increase in M would invariably lead to a rise in either P or Q?

As highlighted on the previous page, the $100bn question for investors now has to be whether the world's commercial banks will actively multiply the money
that the Fed (and other central banks) have been injecting into their economies over the past few weeks.

If they do, then the world should witness a roaring boom of unprecedented magnitude.
If they do not, then the investment environment will have changed.

Three reasons why velocity is unlikely to accelerate
1. OECD banks' balance sheets are already stretched
2. Ratings agencies have lost investors' trust
3. Regulators and lawmakers will fall on the back of banks like a ton bricks

In 1933, Mellon famously advised Roosevelt to "liquidate labour, liquidate capital, liquidate the financial markets. It will lead to a much more moral society."
This, better than any other statement, encompasses the "perma-bear" philosophy:
Sinners have to pay for their sins; and when the central banks step in to give sinners a helping hand, this can only ensure eternal damnation for the rest of us
(either in the fires of an inflationary bust, or those of a deflationary bust, depending on the perma-bear to whom you speak).

As we never tire of pointing out,
There are three things that a central bank can control:
the growth rate of its money supply,
its interest rate,
or the value of its currency.
Unfortunately, as the Chinese central bankers are now discovering, it cannot control all three at the same time.

Full text

Kommentar av Rolf Englund:
Det förstod inte Bunkergänget - därav katastrofen och
därför är det bra att ha en egen valuta.

Nils-Eric Sandberg förstod det och skrev om det för längde sedan i en elegant text (DN 18/9 1987):
"Både teori och erfarenhet säger att staten kan styra bara en av de tre variablerna, ränta, inflationstakt och växelkurs.
Staten kan fritt välja ut vilken av de tre ska fixeras, men bara en.
Ty två av dessa variabler blir i längden alltid en funktion av den tredje.
Om staten fixerar växelkursen får man ta den ränta och den inflationstakt som blir följden.
Om man fixerar räntan till en viss nivå kommer inflationstakt och växelkurs att anpassas efter det. Etc."
Desto tråkigare är det att han ändå försvarade - och fortfarande ursäktar - kronkursförsvaret.



One of my dark secrets is that I find central bank websites extraordinarily interesting.
David Bowen, Financial Times, Published: September 3 2007

First, almost every country has one, which means I can wander around the world seeing how essentially the same job is being done in Tajikistan (, Tonga ( and Thailand (

The Bank for International Settlements, the central banks’ central bank, lists 163 central bank links on its own excellent site (, and that’s without including all 13 banks the greedy old US has.

Even the New York Fed site (, one of the best, has three separate publications areas. The most sophisticated, the Publications Catalog, does not feature in the main navigation because it is a standalone site, run by the bank but shared with the rest of the network – an inevitable source of confusion. On the other hand the Americans wins hands down on educational content, a key role for many central banks, because each of the 13 banks has its own resources that are accessible from any of the sites.

Full text

Top of page


A perfect example of one of these fallacies recently exposed is the widespread report in August that the
Fed had "injected" billions of dollars worth of "money" into the "system" by "buying" "sub-prime mortgages."
In fact, all it did was offer to stave off the immediate illegality of many banks' operations
by lending money against the collateral of guaranteed mortgages,
but only temporarily under contracts that oblige the banks to buy them back within 1 to 30 days.
The typical duration is 3 days.

Prechter, August 30 2007


Although the writing is on the wall, it seems that it is only Daniel that can read it.
This Market, including stocks, bonds, real estate and commodities have all been built on a massive amount of credit and “out of thin air” monetary creation.
Aubie Baltin 17/8 2007

But unlike all previous massive printing press monetary inflations, this one has been based on a combination of huge amounts of easy credit combined with completely unrealistic low interest rates world wide: Beginning with ZERO interest rates in Japan to negative 4% ( 1% interest - 5% inflation) in the USA.

Well my friends, unless you are deaf, dumb and blind, this game is over. “IT” has begun almost exactly as predicted with the trigger being the realization that there were no bids for the attempted sale of CMOs by the Bear Sterns Hedge Funds. The problem was NOT as stated; that they were junk bonds based on sub-prime mortgages, after all they were rated AAA. The real problem is that the world has reached its limit on how much debt can be absorbed.

Suddenly, the whole world realized that the Emperor Had No Clothes and credit virtually dried up everywhere.

What do sub-prime mortgages have to do with Private Equity Hedge Funds and Corporate Takeovers?
NOTHING; except that all credit has virtually disappeared overnight.

Full text of this and other excellent articles by Aubie Baltin

Hedge Funds

Top of page

RECESSION 2008 » DEPRESSION 2009, Aubie Baltin
House Prices - Monetarism


Prudent Bear’s Doug Noland has for years been pointing out that one of the drivers of the credit bubble has been the ever-broadening definition of money.
As the global economy expanded without a hic-up, more and more instruments came to be used as a store of value or medium of exchange or even a standard against which to value other things—in other words, as money. Thus mortgage-backed bonds and even more exotic things came to be seen as nearly risk-free and infinitely liquid. In Noland’s terms, credit gained “moneyness,” which sent the effective global money supply through the roof. This in turn allowed the U.S. and its trading partners to keep adding jobs and appearing to grow, despite debt levels that were rising into the stratosphere. For a while there, borrowing actually made the world richer, because both the cash received and the debt created functioned as money.
John Rubino, 19/8 2007

With a few months of hindsight, it’s now clear that debt-as-money was not one of humanity’s better ideas. When the U.S. housing market—the source of all that mortgage-backed pseudo money—began to tank, hedge funds found out that an asset-backed bond wasn’t exactly the same thing as a stack of hundred dollar bills. The global economy then started taking inventory of what it was using as money. And it began crossing things off the list. Subprime ABS? Nope, that’s not money. BBB corporate bonds? Nope. High-grade corporates? Alas, no. Credit default swaps? Are you kidding me?

No longer able to function as money, these instruments are being “repriced” (a slick little euphemism for “dumped for whatever anyone will pay”), which is causing a cascade failure of the many business models that depended on infinite liquidity. The effective global money supply is contracting at a double-digit rate, reversing out much of the past decade’s growth.

Full text

Hedge Funds

Top of page

Aubie Baltin 6/8 2007

The worst FEAR is that the inevitable Debt Collapse that I have been warning you all about is about to take place and it works something like this:

On the way up, the FED deposits $100 in the Banking system which is then able to lend up to (assuming a 10% reserve requirement) $1,000, thus creating $900 out of thin air (all the while creating an illusion that real money was being created).

Now here comes the problem: Eventually something happens that wakes everyone up to the illusion that the Emperor Has No Clothes. When a borrower defaults on $100, it is the same as the FED taking back their initial $100 thus forcing the Banking system to call in $900 worth of loans.

The money supply has now shrunk by $1,000, not just by the $100 default. This is highly simplified, but do you get it.

During an upswing, a default is rare and any shortfall in Bank reserves is made up by the FED. However, the last 20 year build-up of “out of thin air creation of money and credit” is about to come home to roost. It will shake the world’s financial system to its core. And you can bet that you have only seen the beginning of the Sub-Prime debacle as it will spread as house prices drop by 30 to 50% over the next 3 to 5 years. If you want to know what an overblown real estate bubble burst looks like, just take a look at Japan since 1990.

Real Estate is just beginning to recover after 17 years.

Full text

Aubie Baltin



Top of page

If money can be created from thin air, the opposite is also true:
it can be destroyed as well.
To understand this, we have to understand how the money was created in the first place.
Michael Nystrom, MBA July 20, 2007

August 9 2007: 10:20 AM EDT
The European Central Bank injected $130.5 billion into euro-zone money markets on Thursday to help calm jittery markets roiled by credit problems. The ECB said it had allotted 1-day securities at a fixed rate of 4.00 percent to all banks bidding for funds

09 Aug 2007 10:18 AM ET
The Fed added a total of $24 billion of funds to the banking system Thursday,
some $9 billion more than analysts had expected. The Fed typically adds or subtracts funds from the banking system on Thursdays in order to keep the financial system running smoothly.

Hedge Funds

Wall Street

Top of page

Well-anchored inflationary expectations are not – repeat not – the end all and be all of life.
Accordingly, they should not be the end all and be all of monetary policy,
despite the huge volume of written and oral rhetoric offered by a chorus of policy makers to that effect.

Paul McCulley, Pimco July 2007

No, I’m not winding up for Bernanke bashing, something I’ve promised myself I will never do (regretting with age that I bashed his predecessor to excess). Rather, I want to dissect his and others’ normative advocacy of the primacy of inflationary expectations in the context of the real world. Mr. Bernanke’s speech two weeks ago, Inflation Expectations and Inflation Forecasting,
is a great place to start, because it was in fact a great speech, drawing heavily on a great speech in late March by his colleague, Governor Ric Mishkin, Inflation Dynamics.

Full text

Enligt KI:s mätningar tror inte längre hushållen att Riksbanken uppfyller sitt inflationsmål på 2,0 procent. De tillfrågade räknar med att prisökningarna accelererar snabbare, på ett år med 2,8 procent.
Skillnaden kan verka liten men är oroväckande stor och plötslig. Risken är att de högre inflationsförväntningarna uppfyller sig själva. Det blir lättare att acceptera höjda priser och sedan kompensera sig med fler kronor i lönekuvertet, vilket driver på priserna ytterligare.
Sådana destruktiva inflationsspiraler upplevde Sverige på 1970- och 80-talen.
Peter Wolodarski DN 28/7 2007


Former Federal Reserve Bank of Dallas President Robert McTeer:
real estate wealth is not "savings".
Bad Macro/Wall Street Journal 20/7 2007

Dr. Housing Bubble figures that the Fed and the banks
providing unlimited amounts of money to create the real estate bubble
(which I sarcastically note was created by the Fed and Congress to bail out the busted stock market bubble in 2000, which the Fed also provided the financing for)
has created US$5 trillion in “bubble wealth”.
Mogambo Guru 17/7 2007

Is M3 money warning of an inflationary blow-off in the US?
Ambrose Evans-Pritchard

The Austrian theory of the trade cycle

As Mr King noted only this week: rates of growth last seen in 1990 when inflation was more than 8 per cent.”
Martin Wolf

The main causes of the current buoyancy of asset prices and aggregate demand are the high growth rates of money
Tim Congdon et al

Talk to just about any middle-aged homeowner and they'll probably tell you the same story, "Thank God home prices have skyrocketed - otherwise I'd never be able to retire".

Former Federal Reserve Bank of Dallas President Robert McTeer has broken ranks with many of his peers by coming out and stating what seems patently obvious to many who only dabble in the dismal science - real estate wealth is not "savings".

The main fallacy in monetary theory and policy is the confusion of money and wealth.

Money is wealth from the individual perspective since individuals can usually exchange it for goods and services.

Money -- and financial assets easily converted to money -- may not be wealth for society as a whole if the production of goods and services has not kept pace with claims on it. Early spenders may have some success, but inflation will dilute the buying power of others.

The bottom line is that real wealth has to be produced; it can't be printed.

Full text at Bad Macro


Top of page

Is M3 money warning of an inflationary blow-off in the US?
Ambrose Evans-Pritchard, Daily Telegraph 16 July 2007

If you thought the US Federal Reserve made a grave mistake abolishing data on the M3 money supply last year, you at last have a heavy-weight ally in the City of London. A number of private citizens have - heroically - kept the M3 flame alive. Hats off to them.

Implication: inflation is about to jump up again.

Full text

Can the Fed Control Prices?
Bernanke admitted that he has no control over asset prices or even key interest rates. But does he have control over any prices?
Michael Shedlock 20/7 2007

The Austrian theory of the trade cycle
draws heavily from Knut Wicksell's work on the relationship between money and interest. Ludwig von Mises (1953, pp. 357-66; also see 1966, pp. 538-86 and 1983, pp. 1-6) was the first to combine Wicksell's monetary dynamics with Böhm-Bawerk's capital theory so as to produce a distinctly "Austrian" trade-cycle theory. Hayek (1967) formalized the theory and bolstered it with the insights of David Ricardo and John Stuart Mill. In its essentials, the Hayekian theory shows how a monetary disturbance can induce an intertemporal discoordination of economic activities (the artificial boom), how the discoordination eventually comes to be recognized (the bust), and what adjustments are made necessary by the money-induced discoordination (the recovery).
Hayekian Trade Cycle Theory: A Reappraisal,
Roger W. Garrison, Cato Journal Vol. 6, no. 2 (Fall), 1986

As Mr King noted only this week: “The quantities of broad money and bank lending are now around 14 per cent higher than a year ago
– rates of growth last seen in 1990 when inflation was more than 8 per cent.”

Martin Wolf June 15 2007

The subject of monetary aggregates has recently re-emerged as a subject of polite conversation among central bankers and monetary economists. Last week a group of well-known UK economists wrote a letter to the Financial Times, in which they criticised the Bank of England’s insufficient attention to money growth. Some of you might be tempted to say:
here we go again. The monetarists are rising from the grave and have spotted a good moment to launch a counter-attack.
Wolfgang Munchau, FT 30/4 2007

One of the signatories of this letter was Charles Goodhart, professor of economics at the London School of Economics and a former member of the Bank’s monetary policy committee. Professor Goodhart is certainly not under any suspicion of being a closet monetarist.

But he has argued /Whatever became of Monetary Aggregates, National Institute Review, May 2007/ that the fashion among central bankers and economists to ignore money altogether has gone too far. On this, he is absolutely right.

Full text

Top of page

Can the Fed Control Prices?
Bernanke admitted that he has no control over asset prices or even key interest rates. But does he have control over any prices?
Michael Shedlock 20/7 2007

What the Fed can control.
* Base Money Supply
* Short Term Interest Rates

That's it. If the Fed could control prices, oil would not be over $70 a barrel, food prices would not be soaring and housing prices would not be collapsing.

With M3 expanding at close to 13% the Fed is clearly out of control. But the Fed likes a good party. It helped create the biggest bubble to date in both consumer credit and housing. Supposedly this must be "good inflation" because it primarily affected asset prices like houses and equities.

Full text

Top of page

Person of the Year: Jean-Claude Trichet, Financial Times

As the ECB prepares to raise its key interest rate to a six-year high of 4 percent tomorrow,
Trichet's faith in the importance of money supply is being questioned
by Christian Noyer, 56, who succeeded him as governor of the Bank of France and sits with him on the ECB's governing council.
Bloomberg 5/6 2007

With Mario Draghi's Bank of Italy lining up with Noyer against Trichet and Bundesbank President Axel Weber, the Frankfurt-based ECB is debating how to interpret money-supply data for the first time since its 1999 birth.

Money supply, as measured by M3, has expanded more than the 4.5 percent rate viewed by the ECB as non-inflationary in every month since May 2001. It increased 10.4 percent in April from a year earlier, close to the fastest pace in 24 years.

Germany's history of hyperinflation after World War I makes its policy makers particularly apprehensive about rising prices. In France, by contrast, Sarkozy won the election last month after a campaign featuring attacks against the ECB's focus on inflation instead of economic growth.

A May 23 Bundesbank report called money supply an ``indispensable element'' in gauging inflation pressures.
Weber said in a June 3 speech that monetary statistics still contain ``valuable information'' that ``help predict future inflation.''

Full text

Trichet about Hayek and Monetarism

Jean-Claude Trichet

Bank of England underestimates the 2008 inflation threat
Tim Congdon and others, FT Letter to the Editor, April 24 2007

The relationship between money and inflation is a hugely difficult and controversial area of economics. Nevertheless, most economists are agreed that changes in the overall price level should not be attributed to movements in the prices of particular goods and services, which are often better understood as changes in relative prices. In our view Mervyn King's open letter to the chancellor devoted too much time to discussing recent developments in particular prices. It lacked a clear statement of the causes of inflation.

Our judgment is that the main causes of the current buoyancy of asset prices and aggregate demand are the high growth rates of money and credit over the past two years.

Prof Tim Congdon, Prof Philip Booth, Prof Charles Goodhart, John Greenwood, Prof Michael Oliver, Prof Gordon Pepper, Prof David B. Smith, Simon Ward and Prof Geoffrey Wood.

Full text

Very unusual things going on now
Alan Greenspan said the prevalence of low interest rates throughout the world was one of the things that surprised him as he prepared
his reflections on his past for the new book he was promoting, "The Age of Turbulence."
CNN June 1 2007

The most pessimistic case comes from Tim Congdon in the December Lombard Street Research Economic Review.
Professor Ronald McKinnon has argued that: "American mercantile pressure on Japan from 1971 to 1995 to get the yen up, and fear that that pressure may return, is the root cause of Japan's current deflation and slump" (Exchange Rate Co-ordination for Surmounting the East Asian Currency Crises, Economics Department Stanford). Whether or not it is "the root cause", the appreciation of the yen from Y300 to the dollar in 1971 to around Y100 in 1995, partly under US prodding, did indeed make an important contribution to Japan's current malaise. Prof McKinnon is, in any case, right to argue that the dollar exchange rate cannot be used as an "instrumental variable" for reducing the US current account deficit "which mainly reflects extremely low saving in the US itself".
Samuel Brittan in Financial Times JANUARY 7 1999

A new paper by Tim Congdon, the monetary economist, has helped to codify the transmission mechanism between excessive monetary growth and inflationary booms
Samuel Brittan, Financial Times 14/10 2005

Second, money supply does matter. We are seeing the broad money supply indicators (M-2 and M-3) rise not only in the US but all over the world. This is not a central bank pumping function but a market-driven phenomenon, as leverage is increasing the capital deployed in today's markets. The central banks of the world have largely lost the ability to control the money supply, other than by the narrowest of measures, which are increasingly less meaningful. We are not seeing the rapid increase in money supply show up in inflation or loss of buying power but rather as inflation in asset prices of every kind, as Grantham notes.
Jeremy Grantham, April 2007

The update to the Greenspan/Kennedy report on home equity extraction was a real page-turner.
Seriously, it was pretty good. Economists at the Fed have once again demonstrated why they get paid the big bucks to collect data, assemble tables, and produce fifty page reports with appendices, references, and footnotes all in the proper places. Unfortunately, as is usually the case, they didn't come to many conclusions or provide nearly enough interesting charts. They did a great job at describing the data but seemed distracted by the "personal savings rate" question - to what extent home equity extraction may have contributed to the negative numbers that have been showing up for the last two years when the nation's spending gets subtracted from its after-tax income.
The Mess That Greenspan Made, 24/4 2007


Flattening of the Phillips Curve:
Implications for Monetary Policy
IMF/Iakova, Dora M., April 1, 2007

The focus is on the implications of a globalization-related flattening of the Phillips curve for the trade-off between inflation and output gap variability and for the efficient monetary policy response rule.

Full text


Factor-price equalization - Faktorprisutjämning

Top of page

News at this site

The Mogambo Inflation Alert System (MIAS) buzzer
indicates that monetary inflation is raging around the globe
as all the central banks are busily creating money and credit at monstrously high rates of issuance,
averaging (as I understand it) about 14% a year,
and that means that inflation in prices will continue to get worse and worse
THE MOGAMBO GURU April 04, 2007


‘plus ça change, plus c'est la même chose’

(The More Things Change, The More They Remain The Same)

Interest rates, Recession or Depression?
Aubie Baltin 2007-04-05
Highly recommended

A market correction is coming, this time for real
Much of the good news has come as a result of extraordinary levels of liquidity pouring into opportunities around the globe. To a large extent this is due to the Federal Reserve’s expansionary monetary policies early in the decade and the US administration’s fiscal stimulus.
William Rhodes, FT March 29 2007

Economist Paul Kasriel at the Northern Trust has come up with
a recession indicator that has called six consecutive recessions with no misses
and no false positives dating back to 1962.
Michael Shedlock 30/3 2007

The condition is an inverted yield curve as measured by the 10-yr treasury yield minus the Fed funds rate, in conjunction with an annual rate of change falling below zero on the CPI adjusted monetary base.

Full text

inverted yield curve

Top of page

News at this site

Follow the Money
part of an email exchange between
Graham Makohoniuk and Charles Zentay on the subject of
money, inflation and deflation
March 22, 2007

Graham wrote this in response to Charles's excellent recent essay, "The Good, the Bad and the Ugly" which was originally published here at
It is an extremely clear and concise analysis of money, credit, inflation and deflation.

The FED expands the money supply through the use of credit. It has a number of vehicles to do this.

My contention is that if the money supply (including credit) is increased without a corresponding increase in production (goods and services) that this creates inflation.

The reason that we are not seeing inflation in the official statistics is twofold:
The CPI and PPI measures have been modified.
A material portion of the goods consumed in the USA come from outside the country (say China)

So where is all the extra growth in money supply going?
By necessity, it has to go somewhere, and this has been into assets. That is why we have seen the stock market bubble, followed by the real estate bubble

What might cause deflation?
Either there is no more money left to lend, or no one wants to borrow it.
Both of 6.1 and 6.2 happened in Japan.

Deflation is very, very bad if you own assets or are in debt.Inflation is very, very good if you own assets that have been funded by debt. But, the Austrian school of economic thought says that inflation eventually leads to a credit contraction because, sooner or later, there is no more lending capacity or no more borrowing capacity left (simplistically).

Full text

Austrian school

Top of page

Comments to above
In my mind, deflation CANNOT occur
Charles Zentay, March 28, 2007

I wanted to thank all those who published my last article (with special thanks to Michael Nystrom of who started the ball rolling) and also those who wrote back with comments and thoughts. I was surprised by the number and wide-ranging nature of the responses. However, a theme did emerge. More than any other comment, readers claimed that deflation was more likely to occur than inflation.

In my mind, deflation CANNOT occur. I cannot say it strongly enough.

Deflation occurring in Japan was a very rare occasion, and it was driven by particularities of their banking system and their central bank's unwillingness to move quickly and aggressively enough. It was not an indication of trends to come in the U.S.

Anyway, our esteemed Chairman of the Federal Reserve, Ben Bernanke has written and spoken extensively on the subject of deflation, and I have included a long quote of his below, not to highlight his wit and sense of humor, but rather to show how well understood these issues are and to demonstrate the various tools the government has to overcome them:

- The Congress has given the Fed the responsibility of preserving price stability (among other objectives), which most definitely implies avoiding deflation as well as inflation.....

Full text

Zentay's original article


Comment by Rolf Englund:
But Stagflation certainly can occur.

Top of page

Without cheap imports, CPI inflation will go through the roof.
wait until the U.S. tries to buy imports with depreciated dollars.
Eric Janszen I-Tulip 8/3 2007

To say the least, market sentiment is getting crushed globally.
Now, combine this with still huge Yen carry overhang, and a seriously deteriorating US economy,
and we will now see, and are seeing, the emergence of a world liquidity crisis.
Chris Laird, March 15, 2007

Carry Trade

Henry Kaufman:
Money matters but credit counts
John Authers, FT Investment Editor, March 15 2007

Why so much money? Because we are in the bubble phase of a credit expansion.
And one of the highlights of this period is that the Bank of Japan will lend money at less than 1%.

This tempts speculators to enter the 'carry trade,' in which yen are borrowed…carried over to dollars or other currencies…and invested in higher-yielding assets.
The Daily Reckoning March 1, 2007

This must be a real Monetarist:
- I'm locked down, safe and secure, in the Mogambo Fortress Of Paranoia Central (MFOPC), away from the economic mayhem, and I'm idly surfing the net to monitor the unfolding slow-motion implosion of the world economy. I have my feet up on the console, and I am casually using the barrel of an AK-47 to tap out coded commands to the computer keyboard. Like an idiot, I wasn't really paying attention to what I was doing, old habits being what they are, and I reflexively clicked on Doug Noland's Credit Bubble Bulletin at Instantly, I knew I had made a mistake when, like some searing CIA laser beam burning into my fevered brain, the first thing I see is a graph of M2 money supply over the last twelve months.
It was horrifying, horrifying!
THE MOGAMBO GURU Wednesday, January 17, 2007

Click for The horrifying M2 figures

I keep reading how this is all okay with everybody because nobody understands derivatives!
The real, Sinclairian truth is that they understand it perfectly, as derivatives are very, very easy to understand; these are all just bets that were created, bought and sold for one silly equation-related reason or another,
and the Federal Reserve created all the money to finance it. Is that so hard to understand? Really?
The Mugambo Guru 7/2 2007

Rolf Englund: And what about M3, the old Mondetarists best friend?

M-3 remains hidden by the Fed, so that We the People can’t know what the Federal Reserve is up to.
Where’s the transparency Ben? Check out this monster in the chart.

NO WAY OUT: A 50% DOLLAR DEVALUATION, by Robert McHugh, Ph.D., January 14, 2007

Quantum Finance:
The Science of Making Money Appear Out of Nowhere
Adrian Ash on Dec 27th, 2006

Money Supply and Recessions
relies heavily on the work of Austrian economist Frank Shostak
Michael Shedlock 9/1 2007

This post is an attempt to construct an active chart of money supply data that is useful in assessing the likely direction of future economic activity. This is an ongoing effort that relies heavily on the work of Austrian economist Frank Shostak who has previously written on this subject on the Ludwig von Mises Institute and other places.

Regardless of what the Fed is or is not doing (purposely or otherwise), it is impossible for them to succeed with price targeting

Full text

The Austrian School

Money (Monetarism) is making a comeback
Samuel Brittan, FT 1/12 2006

Any IoU that is accepted in payment for services rendered can be regarded as money. There is a legendary exam question about a traveller who paid for a meal on a remote island by cheque. The natives were so impressed by this strange piece of paper that they passed it from hand to hand without anyone attempting to cash it. Who then paid for the traveller’s meal?

(Please don’t tell me.) This story illustrates the difficulty of defining, measuring and controlling the money supply; and civil wars among the monetarists on such issues have put off many people.

More practically, the money supply has been out of favour because attempts to regulate the economy via monetary targets have proved unsuccessful.

If the welcome decline in the dollar goes much further we may also see a return of US interest in the subject.

In one of the last important articles he wrote before he died, Milton Friedman produced some dramatic graphs comparing the behaviour of broad money before and after the business cycle peaks of 1929 and 2001 in the US and in Japan in the 1990s. (A Natural Experiment in Monetary Policy, Journal of Economic Perspectives, Fall 2005).

Monetary analysis has recently made a comeback because of many signs that, in their efforts to avert recession early this century, central banks permitted an excessive expansion.

One of the best explanations is given by Andrew Smithers, the City of London economist, in his report World Liquidity.

Full text

The current setup is essentially the liquidity trap that Japan fell into.
Michael Shedlock, 22/11 2006

Wikipedia has this (and much more) to say about Liquidity Traps.

Milton Friedman suggested that a monetary authority can escape a liquidity trap by bypassing financial intermediaries to give money directly to consumers or businesses. This is referred to as a money gift or as helicopter money (this latter phrase is meant to call forth the image of a central banker hovering in a helicopter, dropping suitcases full of money to individuals).

Please note that the idea of a "liquidity trap" essentially flows from a Keynesian approach to economic/monetary policy in the belief that there is not enough money in the system and things would somehow be better if more money could be forced into the system.

The liquidity trap develops because there eventually comes a point where the central bank simply can not force additional credit down the throats of prospective borrowers. Practice has shown that although central banks will attempt to fight the resultant deflationary tide they won't resort to helicopter drop methods.

Full text, with links to Wikipedia

Comment by Rolf Englund:
I am sure Friedman and Bernanke meant helicopters as a metaphor

There is a distribution problem. For the last few years Fed has not used helicopterns but instead house prices to put money in the hands of the consumer.

Bad, bad, bad.

As fas as I understand it this is the central critique of the Austrian School.

The money pumped into the system enters the system in a artifical way and firms and households act and inwest in a way that later will be proven wrong.

Helicopters makte the increasing money supply more even, or random and can easily be exchande by other forms of handouts that not disturb the economy like a house price boom.

Is Monetarism Dead?
"Friedman is dead, monetarism is dead, but what about inflation?"


Whatever Happened to Monetarism? (Hardcover)
Author: Michael J. Oliver, Subtitle: Economic Policy-Making and Social Learning in the United Kingdom Since 1979 Released: 1997, Format: Hardcover

Last week’s announcement that Frederic Mishkin will join the Federal Reserve Board chaired by Ben Bernanke marks a turning point in US monetary policy.
Stephen Cecchetti, FT July 10 2006

In this I follow Friedrich Hayek, who wrote in The Pure Theory of Capital:
“It is self-contradictory to discuss a process [inflation] which could not take place without money and at the same time to assume that money is absent or has no effect.”
Jean-Claude Trichet, Financial Times 9/11 2006

Over the next two days, the European Central Bank will host a conference to discuss the role of money in monetary policymaking. At present, the dominant academic view seems to be that monetary aggregates should have no part in monetary policy decisions. From this perspective, money does not deserve to be central to one of the two “pillars” of the ECB’s monetary policy strategy. I do not share this view.

Do not mistake me for a monetary Luddite: I have immense appreciation for the intellectual elegance and sophistication of modern monetary policy models that leave no room for money. In many respects, I fully agree with their implications regarding the benefits of price stability, the crucial importance of central bank credibility, the advantages of pursuing a clear and predictable policy and the centrality of private inflation expectations. Such considerations have governed my own thoughts on monetary policy since I was appointed governor of the Banque de France 13 years ago. These same considerations have also strongly influenced the design of the ECB’s policy framework. Yet, I cannot dispel my doubts that a model of monetary policy that includes no role for money is incomplete in some important respects.

Full text


If there is one area where Europeans are from Mars and Americans from Venus,
it is monetary policy and the role of monetary aggregates.
Last week, the world’s two most prominent central bankers publicly disagreed.

Wolfgang Munchau, FT 14/11 2006

Jean-Claude Trichet, European Central Bank president, argued in the Financial Times why monetary analysis would remain an essential part of the ECB’s tool kit. Ben Bernanke, US Federal Reserve chairman, said a central bank would be unwise to rely too heavily on money since financial innovation had been causing disturbances to monetary statistics.

It seems at first like an ancient Keynesian-versus-monetarist debate but this is not so. For a start, this is about the role of money, not monetarism, the theory that postulated that central banks should target the money supply to stabilise inflation over the medium term. Even the ECB does not go that far.

Monetarism did – and still does – suffer from the devastating critique of Goodhart’s Law, which says that the predictable relationship between money and inflation breaks down when policymakers start to exploit it.

Most – but not all – of the academic community is behind Mr Bernanke.

At an ECB conference last week, Michael Woodford, a monetary economist from Columbia University, made a powerful case against money.*

Those in favour of a separate monetary analysis assign an important role to the transmission channels of monetary policy, such as bank lending or the financial markets. Lawrence Christiano from Northwestern University and Roberto Motto and Massimo Rostagno, both from the ECB, have argued that the traditional neo-Keynesian models cannot conceivably explain the strength of the boom-bust cycles in stock markets. For that to happen, money is essential.

Full text

The role of money: money and monetary policy in the twenty-first century, 4th ECB Central Banking Conference
Frankfurt am Main, 9 - 10 November 2006

The ECB and the Conduct of Monetary Policy: Goodhart’s Law and Lessons from the Eurozone, Lecture, European Institute, London School of Economics, February 2006

Chefsekonomen Otmar Issing vid ECB går i pension
Han har varit den främste försvararen av ECB:s strategi med två pelare
där det inte bara handlar om inflationsbekämpning utan även om kontroll av penningmängden.
Den linjen har varit kritiserad från många håll, men på senare tid vunnit större erkännande.
DN Ekonomi 2/6 2006

Otmar Issing, Europe's high priest of monetary orthodoxy, has confessed that the euro was launched on flawed foundations and is now threatened by "big tensions" between north and south.
"The proper functioning of a monetary union requires flexible labour and good markets. These conditions have not been fulfilled from the start."
Ambrose Evans-Pritchard, Daily Telegraph 31/5 2006

The Austrian economist von Mises developed a theory of the boom and bust cycle based on bank credit expansion.
His an analysis showed that inflation not only affects prices in general, but also distorts relative prices between capital goods and consumption goods.
Robert Blumen, June 11, 2006

This leads to an over-allocation of productive investment into more credit-sensitive parts of the economy, which is reflected in financial markets through increases in financial asset prices. The stock market bubble of the 90s was an example of this, as was the subsequent housing bubble.

Markets are always trying to bring prices back to equilibrium. Under the influence of market forces, investments that were artifacts of an inflationary boom are eventually liquidated in bankruptcy. It is the adjustment of relative prices that brings the economy back to a sustainable balance of borrowing and saving. However, this adjustment process tends to be deflationary. The deflation occurs because, as the artificial forms of life created during the credit expansion phase of the cycle fail and default on their debts. When credit is defaulted, bank credit money is destroyed and there is a contraction of the money supply.

The corrective liquidation process can be postponed for some time through the instigation of another bout of inflation. This has been the Fed’s strategy since the mid-80s

Full text

"The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand, which must cease when the increase of money stops or slows down, together with the expectation of a continuing rise in prices, draws labor and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate--or perhaps even only so long as it continues to accelerate at a given rate . . . would rapidly lead to a disorganization of all economic activity."
F. A. Hayek

Misery Index, Mark II, could help explain why US inflation is so low
To get an easily understood measure of the underlying inflation you could add the inflation rate to the trade deficit.
Rolf Englund, Financial Times 22/6 2006

Sir, While reading Wolfgang Munchau's interesting article "Why they take the strawberries out of the basket" (June 19), about problems with correctly measuring the underlying inflation, I came to think of The Misery Index, initiated by the Chicago economist Robert Barro in the 1970s. As we perhaps remember it is simply the unemployment rate added to the inflation rate. Perhaps a similar Misery Index, Mark II, could help us understand why the recorded US inflation is so low.

In a closed economy, when you spend 107 per cent of gross domestic product you will get inflation of perhaps 7 per cent. In an open economy you might get price stability and a 7 per cent trade deficit. So to get an easily understood measure of the underlying inflation you could add the inflation rate to the trade deficit.

If something cannot go on for ever, it will stop, as Herbert Stein once wrote. When the dollar drops to a level consistent with a trade balance of zero, General Motors and Ford will probably survive, and cars, among other things, will be more expensive, and the recorded inflation rate will rise. If you think The Misery Index, Mark II, is too easy, think of Misery Index, Mark I.

Riksbanken publicerar sammanfattande beskrivning av den penningpolitiska strategin

Läs mer här

If These Are Bubbles, Where Is All That Hot-Air Money Coming From?
Most people and even most economists believe it is the Fed that controls the money supply, and that it is Fed know-how that is maintaining our CPI within historically "reasonable" limits.
Katy Delay, November 25 2006

A minority of us, however, think our present economy is in a falsely optimistic booming phase of a bubble-and-burst cycle started more than ten years ago by excessive credit and money creation, and that the excess dollars are camouflaging themselves in assets and speculation rather than in the CPI.

Doug Noland is one of my favorite bubble theorists. He maintains that money creation has gotten away from the Fed's monopoly at this point, and that it is now manipulated in great part by a pyramid-scheme-like banking game involving the mishandling of a good thing called the securitization of risk.
His November 10, 2006 commentary (Monetary Developments vs. Monetary Aggregates)
paints a gaudy credit bubble that I'll describe here in layman's terms.

Full text

Top of page

The markets are not, in fact, worried about the return of inflation at all.
They are worried about how far central bankers the world over are likely to raise interest rates in their determination to stamp it out. It is not the disease but the cure that investors fear.
Tim Hartford, Financial Times 17/6 2006

Relative prices rise and fall all the time in a healthy market economy and those price movements will always create winners and losers. But high inflation makes the relative price movements harder to fathom, harder to compensate for and probably much larger.

Maintaining moderate inflation is a little like trying to stay moderately pregnant. Let the central bankers give us their medicine, even if the taste is likely to be bitter.

Full text

Over the past six years, monetary authorities have turned the liquidity spigot wide open. This has given rise to an endless string of asset bubbles — from equities to bonds to property to risky assets (emerging markets and high-yield credit) to commodities. Central banks have ducked responsibility for this state of affairs.
That could end up being a policy blunder of monumental proportions.
Stephen S. Roach, Morgan Stanley, 22/5 2006

Modern-day central banking was born out of the Great Inflation of the 1970s.

Price stability became the sine qua non of macro stabilization policy. Nothing else really mattered. Without inflation, it was argued, economies could realize extraordinary efficiencies that would enhance resource allocation and maximize returns for the owners of capital and providers of labor
(see, for example, Alan Greenspan’s 3 January 2004 speech, “Risk and Uncertainty in Monetary Policy”).

The subsequent disinflation was a major victory for central banking. It was also a major victory for the “monetarists” who argued that inflation was everywhere and always a monetary phenomenon (see Milton Friedman, A Theoretical Framework for Monetary Analysis, 1971).
In retrospect, central banking’s finest hour came in the early days of this struggle -- in the immediate aftermath of the wrenching monetary tightenings that were required to break the vicious circle of the inflationary spiral.

By focusing solely on the inflation battle, there is now risk of losing a much bigger war. That’s what the profusion of asset bubbles is telling us, in my view.

Full text

More by Stephen Roach

Alan Greenspan

(Churchill: This was their finest hour)


The rule brilliantly argued for by Milton Friedman in the 1960s was a money supply rule.
But would a monetary rule make sense in the spontaneous and generally innovative economies of, say, the US and the UK?
It is a good question.
Edmund Phelps, Financial Times, 25/4 2006

Nouriel Roubini and David Backus, Lectures in Macroeconomics,
Chapter 6. Money and Inflation

"History of Monetary Systems"

So what happens if the Fed lets inflation slip a little and if the ECB does not?
The most likely consequence is a further fall in the dollar against the euro. I am aware that predictions of an imminent fall in the dollar have often proved mistaken in the past. I will not make that prediction now, except to say that the dollar is still fundamentally and substantially overvalued.
Wolfgang Munchau, Financial Times 22/5 2006

The credit may have been created "out of thin air" by central banks...doesn't it vanish just as painlessly? Alas, no.
Bill Bonner

When a lender doles out a million pounds to a borrower, both of them now feel they have money to burn. Imagine next that the borrower takes an extravagant vacation around the world. The money does not vanish into thin air. Instead, it goes into travel expenses: jet fuel, swanky hotel rooms, pricey bar tabs.

First, the borrower goes broke. Then, when the lender goes to collect, he finds that he is broke, too. And somewhere in Sri Lanka or San Martin is a hotel proprietor standing in front of a brand new wing of rooms. He wonders what's happened to his free-spending customers. What happened to the sound of ice cubes at cocktail hour and the smell of foie gras at lunch? He worries about how he'll pay the mortgage he took out to pay for his new addition.

Not only have the borrower and the lender no more money to spend, but now the hotel owner has thrown away his money on that suite of luxury rooms that no one wants. He'll either have to eat into his own income or capital to keep the thing going...or go bust, too.

Hayek wrote about this too.
"The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand, which must cease when the increase of money stops or slows down....


Headline inflation matters, especially if it races ahead at annual rates of about 4 per cent as it does in the US at the moment.
Core inflation is a misleading indicator in times of protracted increases in energy prices.
Wolfgang Munchau, Financial Times, 19/6 2006

In the US, core-inflation indicators have turned out to be reasonable measures of underlying inflation – but not always and probably not now. Core inflation was a particularly bad indicator in the 1970s when inflation rose sharply in response to the first and second oil crises. In the eurozone, core inflation was never a particularly reliable indicator at any time.

Generally speaking, core inflation is a misleading indicator in times of protracted increases in energy prices. In such times, core inflation lags behind headline inflation. A monetary policy that follows a lagging indicator risks being too slow – “behind the curve”, as they say in the financial markets. It is arguable that US central bankers and private sector economists may have been fooled by the apparent stability of core inflation.

Another problem with core inflation is the impact of the unsuspected volatility of some of its components. In the US, the biggest single component of core inflation is owners’ equivalent rent (OER) – an imputed number that measures the cost of house ownership. Increases in OER have been artificially depressed for a long time because the housing boom created a glut of rental properties.

Full text

The ongoing debate about the significance of owner's equivalent rent within the consumer price index is yet another example of how hapless the nation's dismal scientists are as they continue to formulate monetary policy based on fundamentally flawed measures of "inflation".
As you'll recall, most economists restrict the usage of the word "inflation" to mean "core inflation", which excludes things like energy and food, and since 1983 has utilized Owner's Equivalent Rent (OER) in lieu of actual costs of home ownership.
Tim Iacono, 15/6 2006

In a strange twist of fate however, as short-term interest rates continue to be pushed up, what has in recent years suppressed "core inflation" - declining demand for rental units while nearly everyone was out buying up real estate - is now working against central bankers

Full text

Till allmän överraskning ska jag även i är visa mitt traditionella diagram (Figur 7)som visar sambandet mellan inflation och penningmängd i Sverige. Detta diagram visar hur inflationen har följt ökningstakten i penningmängden sedan 1975. Med inflation avses i diagrammet KPI exklusive bostadsposten. Med penningmängd avses M3 och på senare tid M5 (M3 + statsskuldsväxlar och allemanssparande). Penningmängden har förskjutits sju kvartal och den har justerats med hänsyn till BNP-tillväxten.
Rolf Englund på Nationalekonomiska Föreningen januari 1990
Läs mer här

Top of page

Once, a central banker who did not believe in monetarism would have been viewed as equivalent to a priest who admits to being an atheist.
It is ironic that the Fed is dropping M3 only days after a conference was held to honour Otmar Issing
The Economist, 23/3 2006

Today, America's Federal Reserve barely glances at money. Indeed, from this week it will stop publishing M3, its broadest measure of money. The Fed claims that M3 does not convey any extra information about the economy that is not already embodied in the narrower M2 measure, so it is not worth the cost of collecting it.

It is ironic that the Fed is dropping M3 only days after a conference was held to honour Otmar Issing, chief economist of the European Central Bank (ECB) and the architect of its highly money-oriented policy.

Mr Issing was the architect of the ECB's monetary-policy strategy. He built it using a design taken from Germany's Bundesbank, where he was previously the chief economist. He holds two controversial beliefs that challenge prevailing monetary orthodoxy. First, he thinks that central banks must always keep a close eye on money-supply growth. Second, central banks sometimes need to lean against asset-price bubbles.

As Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.” Monetary aggregates are a fickle guide to the economy over the next year, but over longer periods the link between money and prices still holds. Many big mistakes in economic history were made when policymakers ignored monetary signals: the Great Depression in the 1930s, the great inflation of the 1970s, and the financial bubbles in Japan in the late 1980s and East Asia in the late 1990s.

Full text

Milton Friedman

Otmar Issing

Rolf Englund på Nationalekonomiska Föreningen januari 1990:
källa: Ekonomisk Debatt 1990, nr 3, sid 327 ff

Vi ser också att affärsbankernas lånestock i utländsk valuta är nästan lika stor som den är i svenska kronor. Lånen i utländsk valuta hos affärs- och sparbankerna är tillsammans nästan 300 miljarder. Det är mer än dubbelt så mycket som sparbankernas utlåning i svenska kronor.
Jag föreställer mig att de som har lånat upp dessa 300 miljarder inte avser att ha dessa lån när nästa devalvering kommer.
Jag vill nu fråga finansministern /Feldt/ om denna lånestock, på 300 miljarder i utländsk valuta, som har byggts upp på kort tid, innebär någon förändring för Sveriges del och i så fall vilken?

Läs mer här

This historical 12-18 month lag between a tightening cycle/flat yield curve is what fools many analysts into thinking that yields are still stimulative and that the Fed has more wood to chop.
Bill Gross january 2006


Monetary analysis is essential, not old-fashioned
Can any central bank rely solely on developments in money and credit to come to its policy decisions? The answer is clearly “no”. Can any central bank afford to ignore the information in monetary developments in formulating monetary policy? Again, the answer is “no”.
Otmar Issing, Financial Times, December 15 2005

The European Central Bank announced its monetary policy strategy in 1998, before the start of monetary union.

Monetary analysis goes beyond focusing exclusively on developments in one particular aggregate – M3 in our case – to encompass a rich assessment of other measures of liquidity, as well as credit and financial flows and asset prices.

We sometimes hear that inflation is dead. We are told that assigning an important role to monetary analysis is old-fashioned. It is no surprise that such comments come together. When price developments are benign, monetary analysis is likely to fall out of fashion.

However, we should not wait for inflation to revive before recognising the importance of monetary developments for monetary policymaking.

Full text

Otmar Issing


Europeiska centralbanken har, i samarbete med de nationella centralbankerna i euroområdet, utarbetat ett informationspaket ”Varför är prisstabilitet viktigt för dig?” som riktar sig till barn i yngre tonåren och deras lärare.
Materialet finns tillgängligt på alla officiella EU-språk. Paketet består av en åtta minuter lång tecknad film, elevhäften och en lärarhandledning. Filmen handlar om två högstadieelever, Anna och Alex, och hur de lär sig om prisstabilitet.
Klicka här

Unilaterally and without reasonable explanation, the Fed has decided to stop reporting money supply M3, the broadest of the monetary aggregates and probably the most important statistic published by the U.S. central bank. The decision comes as a shock to many in the financial community and apparently to other central banks, which reportedly were not consulted.
John Williams, Fed Abandons M3 Without Honest Explanation, November 30, 2005


M3 is today definitely not reflective of marketplace perceptions with respect to “moneyness.”
The Fed has lost control of our nation’s “money” and Credit creation processes.
Tim Iacono 30/11 2005

European Central Bankers put great stead in M3 so why has the Fed after all these years decided to cease publication?

"The question that my constituents ask me, I'm going to ask you, 'If the economy is so good and inflation is so well behaved, and there's price stability, then why does everything cost so much more when you go to buy something?"

Over the last ten years inflation as measured by CPI-U has been in the 2-3 percent range, whereas money supply growth has been in the 5-10 percent range, with the fastest growth coming from the M3-M2 component, the reporting of which is being terminated.

Full text

Central banks should not rescue fools
Martin Wolf, Financial Times, August 29 2007

The Stock Market's Da Vinci Code
The Plunge Protection Team
Jonathan Moreland, March. 1, 2006

I have never been a big believer in the Plunge Protection Team (PPT). The 78% drop in the Nasdaq from 2000 to 2002 was my proof.
The Big Picture 3/8 2007

The quest of John Crudele to learn the truth about what is commonly referred to as the Plunge Protection Team (PPT) continues

The second screen shot is from the always-handy site where a little red arrow has been added to a two-year chart of the Dow Jones Industrial Average indicating the date when Mr. Paulson took office.
Tim Iacono 21/5 2007

Full text

Plunge Protection Team - Wikipedia

Treasury Secretary Henry Paulson

Top of page

1st Helicopter Drop Now Being Organized
Bloomberg is reporting Senate Weighs Aid to 2.2 Million Subprime Borrowers
Michael Shedlock 13/3 2007

U.S. lawmakers will have to consider providing aid to about 2.2 million subprime mortgage borrowers who are at risk of defaulting and losing their homes, Senate Banking Committee Chairman Christopher Dodd said today.

Full text

Helicopter Drop

Paulson re-activates secretive support team to prevent markets meltdown
Judging by their body language, the US authorities believe the roaring bull market this autumn is just a suckers' rally before the inevitable storm hits.
Ambrose Evans-Pritchard, Daily Telegraph 30/10 2006

Hank Paulson, the market-wise Treasury Secretary who built a $700m fortune at Goldman Sachs, is re-activating the 'plunge protection team' (PPT), a shadowy body with powers to support stock index, currency, and credit futures in a crash.

Full text


In The Stock Market's DaVinci Code by Jonathan Moreland, the topic of the Plunge Protection Team
is once again discussed by a somewhat mainstream financial writer

Tim Iacono, 14/3 2006

The question of the Plunge Protection Team has been around since shortly after the 1987 crash when the Working Group for Financial Markets was formed under the Reagan administration.

Increasingly, it seems, investors believe that they will be protected from loss. True believers - many on the Internet, as might be expected - point to public statements by no less than Alan Greenspan. During a speech given on Jan. 14, 1997, at a university in Leuven, Belgium, Greenspan said: "We have the responsibility to prevent major financial market disruptions through development and enforcement of prudent regulatory standards and, if necessary in rare circumstance, through direct intervention in market events."

Full text

Plunge Protection Team
It is 2 o'clock on a hypothetical Monday afternoon, and the Dow Jones industrial average has plummeted 664 points, on top of a 847-point slide the previous week. The chairman of the New York Stock Exchange has called the White House chief of staff and asked permission to close the world's most important stock market....
Read more here


Instead of trying to come up with something clever on a subject in which we are already in way over our heads, this post simply provides
a few colorful charts (of M3)
and links to some other stories on this topic
Tim Iacono, 22/11 2005

One of the first things you do for a story like this is consult Wikipedia, where you will likely find more than you'll ever want to know on this or any other subject. A search on Money Supply yields an abundance of information, all neatly hyperlinked and categorized, but the real payoff from Wikipedia comes with a search on Inflation.

Full text


Have you ever wondered why the CPI, GDP and employment numbers run counter to your personal and business experiences?
The problem lies in biased and often-manipulated government reporting.
Shadow Government Statistics

Why does the European Central Bank want to raise interest rates?
The biggest economic issue for Europe today is not structural reform but the ECB’s attitude to the interaction between low interest rates, rising house prices, financial deregulation, mortgage borrowing, and consumption
Anatole Kaletsky, The Times, 28/11 2005

WHY does the European Central Bank want to raise interest rates? Every European government says it shouldn’t. The International Monetary Fund and the European Commission say it shouldn’t. The Fed and the Bank of England say, privately, that it shouldn’t. And the economic statistics certainly say that it shouldn’t. Yet Jean-Claude Trichet, the ECB President, has more or less announced that eurozone interest rates will rise this week.

Does this mean that M Trichet “knows something” that nobody else understands about the condition of Europe? Or is it that M Trichet does not know something that everyone else understands very well? For example, that economic policy has progressed a long way since the Bundesbank’s pre-Keynesian sado-monetarism.

I have argued that the biggest economic issue for Europe today is not structural reform but the ECB’s attitude to the interaction between low interest rates, rising house prices, financial deregulation, mortgage borrowing, and consumption. Would it allow an Anglo-Saxon style virtuous circle to develop and become a solution to Europe’s under-consumption? Or would central bankers see rising house prices and mortgage borrowing as a dangerous symptom of profligacy, to be stifled before it got out of hand.

Full text

House prices


The European Central Bank is about to raise its interest rate for the first time in two and a half years. Does this move make any sense?
The ECB must not let an obsessive worry over what appear to be non-existent inflationary dangers kill off a fragile recovery.
That would be worse than a crime. It would be a blunder.
Martin Wolf, Financial Times, November 30 2005

Real short-term interest rates have been zero or negative for most of the last two years and the growth of money and credit has now reached 8.5 per cent.

Real interest rates

Discontinuance of M3
What's Happened To M3?
David Chapman, November 10, 2005

Full text


Deteriorating Global Liquidity
a large current account deficit is almost irrelevant
Niels C. Jensen, Partner Absolute Return Partners LLP, 21/11 2005

A substantial part of foreign reserves held by the Fed belong to Asian central banks. Virtually all Asian countries are importers of oil. The sharp rise in the price of oil has created a new situation, where the growing U.S. current account deficit is not matched by a corresponding growth in the Asian surplus, simply because they are spending more dollars on their oil purchases, just like we are.

It is virtually assured that a significant deterioration in global liquidity will cause some sort of crisis somewhere. It always does. We cannot say for sure where the skeletons will pop up this time, but urge you not to ignore the fact that Indonesia took a bit of a battering in August and September of this year. Although Indonesia is an OPEC country, it is actually a net importer of oil and it has, like many other Asian countries, a system in place whereby retail energy prices are heavily subsidised.

The majority of people we speak to are still bearish on the dollar, and since this bearishness is often based on the large U.S. current account deficit, let's begin our discussion there. The first point we would like to make, and we wish to make it rather emphatically, is that it is too simplistic to assume that a large current account deficit automatically leads to a weaker currency. For a small country this may very well be the case, but a large country such as the U.S. could probably live with a substantial deficit almost in perpetuity.

Full text


Anatole Kaletsky, The Times, 10/11 2005

Between late 1980 and 1984, interest rates in Britain were slashed from 17 per cent to 8.5 per cent. As a result of these dramatic rate cuts, the value of sterling halved from $2.40 in early 1981 to just $1.05, giving what was left of Britain’s manufacturing industry an enormous boost.

The monetary stimulus from these rare cuts and devaluation was what triggered the recovery of the British economy — far more than Mrs Thatcher’s labour and trade union reforms. Significantly, only one of the great supply-side reforms for which Mrs Thatcher is now remembered was implemented before the economic recovery of 1982-84. This was the sale of council houses and financial deregulation that helped to produce the house price boom of 1982-85.

The labour reforms and privatisations that came later were absolutely necessary to consolidate the recovery of the early 1980s and to prevent it developing into an inflationary spiral; but it was the monetary easing, devaluation and housing boom that got the economy moving.

Full text


It seems clear the Fed is not going to find it easy to maintain relative price stability.
Brad DeLong, Financial Times 28/10 2005
The writer is professor of economics at University of California, Berkeley, and and NBER research associate

Why? Because rising government nominal debt puts irresistible upward pressure on price levels. The government needs to balance its budget in the sense of keeping the growth of nominal government debt in line with real gross domestic product growth. If the government does not achieve effective balance, the market will balance the budget for it. And when the market balances the budget, it does so by levying the inflation tax on the economy. That is the unpleasant monetarist arithmetic.

The inflation tax is a bad tax. It haphazardly redistributes income and wealth. It degrades the ability of the price system to convey accurate signals on social scarcities. It redirects business attention from making more and better products that consumers want to focusing on any change in the value of the monetary standard.

Through the 1970s, America had a strong institutional mechanism that kept the government budget from getting too far out of balance. Bracket creep – the fact that with a progressive but unindexed tax system, inflation raised taxes as a share of GDP – gave an automatic yearly boost to revenues whenever inflation increased. In the 1980s, this institutional mechanism was erased.

Without strong core support in both political parties for effective budget balance America will not have the institutions needed. Without institutions, America will not have effective budget balance. Without effective budget balance, America cannot have effective price stability in the long run.

Full text

Brad DeLong Blog

Alan Greenspan will be remembered as Copernicus, Columbus and Galileo, rolled into one.
In Europe central bankers and politicians still refuse to learn these lessons. They are still trying to apply the simplistic monetarist theory once believed to be the only alternative to the old gold standard, but thoroughly discredited by the Greenspan Fed.
Anatole Kaletsky, The Times, 27/10 2005

Mr. Bernanke
The Phillips Curve - the notorious trade off between inflation and unemployment that is still popular among the Fed staff and in Congress - has been intellectually repudiated.
Mr. Bernanke supports making the Bush tax cuts permanent as soon as possible. He's an ardent free trader. One mystery is where he stands on the global monetary system, and the growth benefits of stable exchange rates.
Wall Street Journal editorial 25/10 2005

Full text

Alan Greenspan



". . . The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can reduce the value of a dollar in terms of goods and services," Bernanke explained in his speech to the National Economists Club in Washington, D.C. on Nov. 21, 2002.

Governor Ben S. Bernanke, November 21, 2002,
Deflation: Making Sure "It" Doesn't Happen Here

Let's look at what Bernanke really said.
"Sustained deflation can be highly destructive to a modern economy and should be strongly resisted. Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy's underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act..."
John Mauldin, 28/10 2005
Very Important Article

On one level, this speech breaks no new ground from that of the previous Federal Reserve white paper on the causes of deflation in Japan, and what the US Fed and other central banks could do to avoid deflation. I wrote about that paper in the summer of 2002, stating that it was clear to me, at least, that the Fed understood the nature of the problem and was telling us they did not intend to see the US slip into deflation. This is one reason I believe the speech is reflective of Fed thinking, and not simply Bernanke's thoughts.
The difference between that paper and Bernanke's speech is two-fold. The paper was presented in the framework of an academic exercise, and had no official stamp of Fed governor approval. It could be viewed as theoretical, although I and a number of other analysts did not see it that way.
Secondly, this speech was actually delivered in very clear, well written English. The average layman could read and follow the thoughts.

Let's look at what Bernanke really said. First, he begins by telling us that he believes the likelihood of deflation is remote. But, since it did happen in Japan, and seems to be the cause of the current Japanese problems, we cannot dismiss the possibility outright. Therefore, we need to see what policies can be brought to bear upon the problem.

He then goes on to say that the most important thing is to prevent deflation before it happens. He says that a central bank should allow for some "cushion" and should not target zero inflation, and speculates that this is over 1%

JM: My concern is that we are not in a typical business cycle. Just as a number of different economic factors all came together to cause the boom and then bubble of the 80's and 90's (disinflation, lower interest rates, lower taxes, lower international tariffs, the demographics of the Boomer Generation, stability, etc.), I think there are now forces at work which may not respond to the Federal Reserves levers (such as inflated housing prices, a monster trade imbalance, large government deficits, huge personal debt burdens and a boomer generation which will need to save more to retire, among many issues). But that does not mean the Fed will not pull them.

For Bernanke, "Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers."

Full text

1929 and all that

Demand and Supply


Part 28: The Chicago and Austrian Economists on Money, Inflation, and the Great Depression

Both the Austrians and Chicagoans, as we have seen, rejected Keynes's argument that the market economy was fundamentally unstable and likely to generate extended periods of unemployment and idle resources. They both also argued that when inflations and depressions occurred, they were the result of monetary mismanagement and government interventions that reduced market flexibility in the face of changing circumstances. And both schools of thought were suspicious of discretionary monetary and fiscal policies, particularly of the Keynesian type, believing that they would only make for less stability, not more.

But the Austrian economists and the members of the Chicago school have differed on a number of crucial issues in the field of monetary theory, history, and policy. Central to those issues are their different interpretations of the causes and cures for the Great Depression of the early 1930s.

Friedman and most other monetary theorists in the Chicago tradition accepted the Keynesian idea of a macroeconomic or aggregative analysis

The Austrian economists have taken a different view. They have argued that it is important not to forget that statistical averages of total output and the general price or wage levels do not exist in reality.

Friedman reaches his conclusion by analyzing changes in the money supply in the following way: Imagine that a helicopter randomly drops money down on a population; the people of the society pick up the money and proceed to spend it until prices have risen to a level high enough to once again balance the demand for money with the increased supply.

The Austrians have argued that while it is true that in the long run, increases in the money supply do result, other things held unchanged, in a rise in prices in general, it is necessary to analyze the process by which changes in the money supply enter the economy and the particular ways they influence individual demands and supplies and individual prices and production plans.

The Austrians, looking beneath the stable price level of the 1920s, have argued that if not for the expansion of the money supply during that decade, prices would have slowly fallen to reflect the significant increase in productivity and output due to technological innovations and capital formation. Instead, Fed monetary expansion kept prices higher than otherwise would have been the case, which created the illusion of economic stability through a stable price level and brought about an unsustainable misdirection of capital investment as well as labor and resource misallocation. The imbalances Fed policy produced finally became visible after 1929.

Why is the US Fed so concerned about deflation that Mr. Bernanke even suggested dropping US dollar bills from a helicopter in order to combat it?
There is one condition under which deflation is a disaster and this is when total credit market debt is high as a percentage of the economy
Marc Faber, October 18, 2005

Enter Ben Bernanke and His Helicopter Printing Press
One of the key jobs of the establishment is to con the population into believing all is well. Running the confidence game well is of course important, because if everyone believed as your editor does, that we are heading inexorably toward a deflation, people would begin to behave in a manner that would in fact ensure that outcome. If everyone did what I did - sell their house and put the money in the bank, by definition our inflationary economy would run into reverse. In short, it would deflate and we would indeed face a 1930s replay or something much worse. Policy makers see it as their task to avoid that outcome.And so, a couple of years ago, when the Federal Reserve, in looking at the Japanese experience, really became worried about deflation in the U.S. and lost confidence in Keynesian and Friedman economics, the trotted out Ben Bernanke to assure the American people that the ideas of Keynes and Friedman were not barbaric relics, but in fact could and would work. In his infamous speech, Ben Bernanke assured Americans that deflation could not ever happen here because now we are much smarter than anyone who tried to avoid deflation by implementing fiscal policy in the past. Not only are we much smarter than the Japanese and our grandparents were in the 1930s, but now we also have very high technology printing presses and if needed we could even equip helicopters with monetary printing presses and shower the money out over the population to avoid deflation
Read more here

So is Hyperinflation the end game? Perhaps. If what Matt Savinar of Life after the oil crash implies is true in that the dollar is nothing but a proxy for energy availability - then the monetary system may well be headed for chronic deflation, not hyperinflation. So where does the truth lie? If deflation is the true specter then what impact will Bernake and his helicopter money bring to bear to solve the problem? Perhaps that will enable us to continue to grow the money supply so that I can one day pay my debts - even though cheap energy is becoming scarcer?
This is the point where I believe the equation gets very interesting.

To a large extent, the strict Quantity Theory was viewed only as a long run theory dependend upon "helicopter drops" of money.
. Fisher, in particular spent much effort discussing "the temporary effects during the period of transition separately from the permanent or ultimate effects [which] follow after a new equilibrium is established - if, indeed, such a condition as equilibrium may be said ever to be established." (Fisher,, 1911: p. 55-6).
Read more here

Inflation and the Phillips Curve

So the helicopter analogy is now a fable, although you still might find it in traditional economics textbooks.
Again, in the old days, when monetarists attempted to control the money supply within targeted growth bands, the fed funds rate changed like stock quotes on the New York Stock Exchange — and the Fed still couldn’t control the money supply. The fed funds rate exhibited extreme volatility in the 1970s and early ’80s under monetarism, and relative stability during the late ’80s and ’90s under a price rule (i.e., the Fed’s focus on controlling interest rates rather than the money supply). This stability in interest rates may have also contributed to the long-term downtrend in long-term interest rates. So the helicopter analogy is now a fable, although you still might find it in traditional economics textbooks.

Dear Ben, Congratulations on your nomination as chairman of the Federal Reserve
Do not believe for a moment that targeting inflation is all there is to being a successful Fed chairman
You will need to react strongly to low probability, high cost dangers.
Martin Wolf, Financial Times, October 26 2005

Ben S. Bernanke
Essays on the Great Depression
Princeton University Press May 2000
Click here

The New Inflation
It is not clear what type of inflation - CPI or asset-based - will arise from excess monetary accommodation.
We've learned a lot about inflation in the past 35 years. From the double-digit price increases of the 1970s to a close brush with deflation in 2003
Stephen Roach, October 17, 2005

The decade of the 1970s... Central banks had yet to understand the message of Milton Friedman, that "Inflation is always and everywhere a monetary phenomenon."

The 1980s were a backlash to the 1970s, in effect, dominated by disinflation and by the ascendancy of monetary policy as the change agent. Paul Volcker led the charge, embracing an eclectic monetarist framework in late 1970 when America's CPI inflation rate was surging at a 13% annual rate. He pushed the federal funds rate all the way up to 19% in 1981 in an effort to wring inflation out of the system. The experiment worked.

The US went into its worst recession since the Great Depression, and a deeply ingrained inflationary mentality cracked. Along the way, the resistance of US labor crumbled -- collective bargaining contracts were re-opened, wage indexation clauses were abandoned, and the insidious expectational spiral started to unwind. The cure -- however painful -- was a decisive victory for Milton Friedman and the monetarist doctrine he espoused.

The 2000s began with a breakdown of monetary discipline in a post-asset-bubble world. Three months into the millennium, the equity bubble burst. Central banks dusted off the script of the 1930s and eased aggressively, injecting more and more liquidity into disinflationary economies. Real interest rates dipped back into negative territory, and the developed world lurched from one asset bubble to the next -- from equities, to bonds, to property.

The notorious "core" CPI actually ticked down to 2.0% in the 12 months ending September 2005... This raises a fundamental question about the inflationary impacts of supply shocks in a globalized world economy.

Full text

Comment by Rolf Englund:
I never thought that I would argue that Stephen Roach is neglecting the US Trade Deficit. But so be it. What will happen to the US inflation rate when the dollar dips?



It is intriguing that a theory developed by American economists is disregarded by the US authorities but is taken very seriously in Europe. It is equally puzzling that Keynesianism, which is utterly discredited in the academic world, has continued to guide the actions of the US authorities in the past 10 years, and even seems to be working.
Paul de Grauwe, Financial Times 17/8 2005

Austrian economics
Many economic commentators claim that trade deficits are never a problem. They are perfectly correct, just as spots are never a problem when someone gets measles.
My point is that if a trade deficit is being driven by a loose monetary policy then recession tends to be unavoidable.
A monetary-induced deficit by the United States distorts the pattern of international trade as well as internal investment. Many of its enterprises will become excessively oriented toward the domestic market. The opposite holds true for foreign exporters.
Gerard Jackson, 17/10 2005

Something is changing in policy doctrine.
After a couple of decades in which the money supply almost disappeared from view it is now coming back
A new paper by Tim Congdon
Samuel Brittan, Financial Times 14/10 2005

The mainstream approach, exemplified by the majority in the Bank of England Monetary Policy Committee, is to look at the immediate prospects for economic growth, then check that the financial markets are not signalling a return to inflation; and, if not, to carry on pumping demand into the economy.

The opposite view was recently put by Mr King, who explained in a speech on Tuesday why “the economy cannot grow at a constant rate in every single quarter”. He rejects the assumption that central banks “can and should control the short-run path of output”. Not only are there lags between the recognition of economic shocks and the impact of corrective policies, there are also supply shocks that central banks can do little to change. The higher oil price, for instance.

The rebalancing of the composition of demand is likely to mean some volatility in its total.

More important, attempts at fine tuning that ignore monetary indicators can lead to cycles of boom and bust in asset markets that can be highly damaging, even if they do not have much impact on the particular group of prices that it is conventional to put into consumer indices.

A new paper by Tim Congdon, the monetary economist, has helped to codify the transmission mechanism between excessive monetary growth and inflationary booms*. Mr Congdon does convincingly show how a build up of financial balances in relation to income will lead to a rise in asset prices, notably housing, which will eventually make households feel wealthier and spend more. The spurt in the price-to-income ratio for US housing from about 3.2 in the late 1990s to 4.2 today helps to justify the gradual levering up in official interest rates now taking place.

Money and Asset Prices in Boom and Bust, Institute of Economic Affairs

Full text


From January 1980 to January 2005, M3 US grew 420%.
Dow Jones Industrial Average returned 1,098%
Jim Jubak CNBC 1/4 2005

Samuel Brittan happened, prompted by Professor Charles Goodhart, to read Professor Milton Friedman’s seminal presidential address to the American Economic Association in 1967 somewhat sooner than any other prominent commentator in Britain at that time
About "Against the Flow" by Samuel Brittan, Atlantic Books £25, 385 pages
Peter Jay 12/2 2005

Peter Jay was for more than 20 years economics editor of The Times and later of the BBC. He is a non-executive director of the Bank of England.

It contained the “thunderbolt” thought that the Phillips curve (the supposed trade-off between inflation and unemployment) is vertical; that is, that however high inflation goes unemployment will in the long term always be the same - and therefore all attempts to achieve full employment by fiscal and/or monetary demand management were doomed.

The price of any unemployment below the “natural” level set by the structure of the labour market could only lead, not as postwar British policy had supposed, to faster but possibly acceptable inflation, but to geometrically accelerating inflation, a self-evidently unacceptable consequence. The recognition of this truth transformed British economic policy-making over the next 10 years, chiefly under a Labour government. Brittan’s role in this was central. He changed the intellectual climate by the power, lucidity and topicality of his writing.

But we must return to the economics. It is typical that in the new volume Brittan is challenging the conventional wisdom of current economic management with as much freshness and recalcitrance as he once applied to the dismal agonies of Chancellors such as Selwyn Lloyd and Tony Barber. Only missing now is the intense official disapproval that attended his refusal 40 years ago to accept that £1 did, should, must always and most certainly would always equal $2.80, since when its market price has fluctuated between $2.81 and just over $1.

It is, incidentally, good to see in his latest book that his passionate hostility to fixed exchange rates almost anywhere at almost any time - spelt out most persuasively in his third book, The Price of Economic Freedom (1970), - is restored to its rightful place in his pantheon of economic ideas.

A slump without falling consumer prices might, Brittan argues, require official corrective action. This would not necessarily be forthcoming from the MPC, either because the inflation prospect did not require it or because the kind of action available to the MPC, for example zero interest rates, was not sufficient to the needs of the situation. The economic sin against the Holy Ghost of heavy government deficit spending financed by the central bank might be required; and this ugly situation, Brittan speculates, could be triggered by a boom-bust collapse of some major category of asset prices. An example would be my own prognostication a year ago of a possible 50 per cent crash in house prices over the next two or three years, which now seems to me firmly on track in spite of all the huffing and puffing of those whose interests oblige them daily to pretend that all will somehow end well.

Full text

Milton Friedman

About Milton Friedman at

"Against the Flow" at


"What has Happened to Monetarism?
An Investigation into the Keynesian Roots of Milton Friedman's Monetary Thought and Its Apparent Monetarist Legacies"
Jörg Bibow, The Levy Economics Institute, June 2002

It is widely perceived that today's conventional monetary wisdom, and the common practice of monetary policy based thereupon, is essentially "monetarist" by nature, if not by name.

One objective of this paper is to assess whether monetarism has had a lasting effect on the theory and practice of monetary policy; another is to scrutinize the key dividing lines between Milton Friedman's monetary thought and that of John Maynard Keynes.

Full text

The Wonderful Wizard of Oz by L. Frank Baum (Chicago, 1900) is a parable about Money Reform and the 1890s Midwestern political movement led by William Jennings Bryan (1860-1925)

Bryan was three times candidate for President of the United States (see his poster at bottom of this page).
From 1891-1895 Bryan served in the House of Representatives, where he advocated the coinage of silver at a fixed ratio with gold, in order to break the bankers' monopoly and manipulation of the gold-backed currency.

Bryan and his supporters accused Eastern banks and railroads of oppressing farmers and industrial workers. Bryan believed that a switch to silver-backed currency would make money plentiful. Although correct, Money Reformers today would argue that money need not, and should not, be backed by either silver or gold, but only by the people, their skills, and their resources.

Full text