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Market Monetarism, NGDP Targeting, Same Ole Same Ole.

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Lio67 sent me a comment. “I wonder what Smiling Dave has to tell about market monetarism and NGDP targeting. I have not yet seen anything about it in this blog. I think this is a hot topic!”

OK, off to Wikipedia:

Market monetarism is a school of macroeconomic thought that advocates that central banks target the level of nominal income instead of inflation, unemployment, or other measures of economic activity, including in times of shocks such as the bursting of the real estate bubble in 2006.

In other words, up until now the central banks of the world had two jobs. The first was to keep inflation at a satisfactory rate. In the old days, when the average person hated inflation, they said satisfactory meant to keep it low, thus keeping the citizenry satisfied. But years and years of continual brainwashing have finally convinced people that inflation is not so bad, after all. So now “satisfactory” means “satisfactory to the powers that be”, meaning high enough to give them free money, but low enough to keep the citizenry from rioting.

The result? Exactly what Austrian Economics predicts, mainly a boom followed by a bust, or recession. The higher the inflation, and thus the higher the initial boom, the worse the bust. Since the mainstream economists in charge believe inflation is a cure for the bust, they have been inflating like good little boys. And Austrian Economics agree that it will, in theory, give temporary relief, but with a painful payback to follow.

Now, to the surprise of the mainstream, this time around the relief is not here, despite the inflating. What gives? Austrians who thumb through their copy of Human Action know the answer:

The boom can last only as long as the credit expansion progresses at an
ever-accelerated pace.

In other words, once you start inflating, you have to keep inflating faster and faster, more and more, or else the recession will come. [Because every inflation creates more parasitic jobs, what Mises called malinvestments, which need more paychecks]. And so it has come. We have been inflating for so many years now, it would require vast amounts of inflation to bring the zombie economy back to a semblance of life.

Another job central banks have is to keep employment high. Austrians understand that a requisite for that is that the central bank get out of the way and stop printing money. But then, where would the govt get its free money from? So the mainstream has a different answer. Inflate, and that will increase employment, too. Again, Austrians agree that this might work in the short run. And again, they add that to keep it going, you need ever accelerating inflation. And again, we have reached the point where the kind of inflation that central banks have dared until now is just not working.

So what can they do? The answer, of course, is going to be print at an ever accelerating rate. Austrians know it [as above], and the mainstream knows it [though they have other explanations why, and do not see any bad side effects]. But what is the justification? To handle inflation? High inflation is not exactly handling inflation. To keep everyone employed? Even with full employment, people will be very unhappy if their money buys a lot less than it use to last week, every single week. So they need a new to justify the vast money printing that awaits us.

And that’s where Money Monetarism, by incredible coincidence, comes in. It’s as if the Heavens had opened and revealed a new and convenient truth. Under this new plan, the money printing is supposedly going to save the whole economy. Everyone will benefit. And don’t worry, if prices are going up now, our new handy dandy system will make them go down someday. Chin up, guys. Prices are only going up because the economy needs it. When it’s no longer absolutely necessary, prices will normalize. [Or at least, that’s what they say. An Austrian will counter that it will always be necessary, as explained above].

So what does Money Monetarism mean? “Monetarism” is code for “printing money”. “Money Monetarism” means “printing enough money so that it looks like everyone is getting richer”, as opposed to printing to take care of inflation or unemployment or to manipulate an interest rate.

What’s the plan? Very simple. Look at the GDP today. Say it’s 14 trillion dollars. We want GDP to grow by five percent a year, which they think is an indication of a thriving economy. But there is a recession, and GDP is actually sinking, not growing. So what do we do? Simple. 5% of 14 trillion is 700 billion, right? So we’ll just print a new seven hundred billion, give it to the govt or the banks to spend, and voila. GDP has grown by 5%.

Now a wise guy may ask, “Uh, fellows? You have created more paper, but even you know that an economy gets richer by increasing production, not by increasing paper money.”

And they have an answer. “We are all Keynesian now. More paper means more spending. More spending creates more jobs. More jobs creates more demand, which magically creates more supply [despite Austrians mocking this assertion, we think it’s true anyway], which is, by definition, increased production.”

Here’s the line from Wikipedia that shows their thinking, emphasis mine:

Monetary policy which would ensure a NGDP expectation is met (e.g. a level that reflects 5% NGDP growth from a normal trendline) by definition avoids recessions in nominal terms, and by maintaining aggregate demand also avoids deep recessions in real terms.

In other words, Money Monetarism is the same old tired Keynesian-ism, disproven many times over by the great Austrians. [Do a search here for Keynes].

The key tenet of modern Keynesian-ism is “Print money, and everything will be fine.” The only question is “How much money?” Until now, the various answers were until inflation is 2 percent, or until interest rates are zero percent, with minor variations. But those don’t work anymore, because they give answers way too small for the advanced state of decline we are in. The zombie economy will no longer walk with so little printed money pumped into it.

Along comes Money Monetarism with a new answer to “How much money do we print?”, one that is way way higher than anything done until now.

Here’s a frightening quote from Wikipedia, emphasis mine:

The Economist describes the market monetarist approach as potentially including “‘heroic’ purchases of assets, on a bigger scale than anything yet tried by the Fed or the Bank of England.”

Some heroes. As if you have to be a hero to spend other people’s money.

One final thought. The Fed does not have to report to anyone how much money it prints, nor what it does with the money. I suspect that it has already gone way beyond printing the 5% a year that the Money Monetarist crowd thinks is the magic number that will make everyone happy. But that’s just me.

OK, Lio67, that’s all I’ve got.



  1. lio67 says:

    Thanks for this post. I completely agree with you. Market monetarism sounds rather like mercantilism or keynesianism. Sumner, Glasner, Christensen and co have their own blogs where they present their ideas. In particular, do you know David Glasner’s blog, Uneasy Money? In his blog, David Glasner comments on monetary policy in the sprit of R. G Hawtrey. There are several articles decrying Hayek and Mises. It is worth it to look over. I have not seen many Austrians disputing his vision on his blog.


  2. Smiling Dave says:

    I looked at it now. Clearly a nut job, in love with inflation.
    He says things like, clearly inflation is only 1%, according to the all wise Fed, not the 2% the all wise Fed says it should be. So why don’t they get out there and inflate?


  3. lio67 says:

    There is a serious antagonism between Market Monetarists and Austrians about the true causes of the great depression. For market monetarists, the 1920s were not inflationary and there was no bubble while for austrians it is the opposite. For market monetarists, as for monetarists like Friedman, the FED should have inflated in the 1930s instead of doing the opposite. It is the most popular version of the causes of the great recession since friedman and schwartz’s work. What do you think about it? Who’s right?


  4. Smiling Dave says:

    I think everyone agrees there was an increase in the money supply in the 1920’s. Austrians define that as inflation, the kind that is sure to induce a business cycle. If other things stay the same, it will lead to higher prices as well, in which case we have stagflation. But sometimes it doesn’t, if there are forces at work in the economy pushing prices down, such as improvements in productivity due to inventions, which is what happened in the twenties.

    I imagine MM’s define inflation as price inflation, so they claim correctly there wasn’t any.

    This all illustrates what Mises wrote, that in the real world of a complex economy, the data alone do not tell the story. Given the same data, Austrian theory explains the Great Depression one way, MMs and Friedman another way. The data fits both versions. So you have to prove or disprove a theory from somewhere else besides the data. Mises claimed he could prove from logic applied to self evident axioms that he was right. What do the MM’s and Friedman have?


  5. lio67 says:

    I fully agree. Also, you might enjoy what Bob Murphy said about it here. http://mises.org/daily/5826/.


  6. lioneldelm@gmail.com says:

    Hi Dave,

    Did you read David stockman’s The great deformation? What do you think about his critics of Friedman’s view that the FED failed to pump enough liquidity into the banking system during 1929-1933?

    Stockman writes : “there was no liquidity shortage” during that period and “commercial banks were not constrained at all in their ability to make loans or generate demand deposits (M1)”.

    He even argues that Friedman’s entire theory of the Great Depression has been demolished by Ben Bernanke who increased the excess reserves of the U.S. banking system from $40 billion to $1.7 trillion as of 2012 with little or no recognizable effect on the real economy. It makes sense!


  7. Smiling Dave says:

    I didn’t read it, sounds interesting.


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