Recessions are not the Result of Animal Spirits, they are a Direct Result of Monetary Policy

How Monetarist Policy can Save our Economy

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In the last few weeks, I’ve spoken with several people who say they can “feel a recession coming.” One said he’s bearish and thinks this is not going to end well. Another says, “Every time we hit very low unemployment in the US, a hard crash follows.”

Soft Landing?

The amount of money in circulation can either stimulate growth and spending or discourage it. After a speech by the Nobel-laureate economist Milton Friedman at Stanford in 1998, a reporter summarized:

Speculators aren’t the evil beings government leaders make them out to be. The International Monetary Fund and World Bank make people poor and destabilize countries. The Japanese central bank has made the same mistake as the U.S. Federal Reserve did when it started the Depression, slamming the brakes on printing money too fast.

The Keynesian view of our economic condition is that the Fed is out of ammunition. Once interest rates are close to zero, the Fed has no more firepower to stimulate the economy, save the politically unfavorable quantitative easing — injecting money into the economy. Many people feel that — like a loan that must be repaid — these injections must, some day, be undone to restore equilibrium.

On the other hand, the Monetarist view is that the government doesn’t need to be in the interest-rate business at all. Monetarists believe the market should sort out interest rates and governments shouldn’t interfere with them. They believe it’s the central bank’s job to add money into circulation when aggregate demand drops and pull it out of circulation when demand overheats.

Pumping Money

While simple in principle, it requires the Fed to let go of their Keynesian models and give the markets the assurance that they will “do whatever it takes” to keep long-run economic growth on target by continually adjusting the amount of money in circulation.

Rule-Based Monetary Policy

This kind of autopilot for monetary policy would go a long way toward stabilizing the US economy and provide the long-run growth we need to keep up with Asia. It would also have a strong stabilizing effect on countries around the world who watch what the Fed does and often copy it.

Summary

To learn more about nominal GDP level targeting, read my Short Primer on Money.

Advanced students will be interested to read An Overview of Nominal GDP Level Targeting by David Beckworth.

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David Siegel is the author of five books on technology and business and two e-books on economics. His full body of work is at Dsiegel.com. His upcoming book is called The Machine Economy. His blog and newsletter are at Permissionlessfinance.com

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Provocateur, professional heretic, slayer of myths, speaker of truthiness to powerfulness, and defender of the Oxford comma.

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