Paul Kasriel points to Milton Friedman’s “Reviving Japan” as relevant to present U.S. monetary policy. What follows are a series of quotes from Friedman’s 1998 discussion. Kasriel argues that if it were good enough for Japan in 1998, then surely if Friedman were alive today, he would argue its appropriate for the US:

“The surest road to a healthy economic recovery is to increase the rate of monetary growth …”

“Defenders of the Bank of Japan will say, ‘How? The bank has already cut its discount rate to 0.5 percent. What more can it do to increase the quantity of money?”

“The answer is straightforward. The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan …”

“There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately.”

“… (I)t is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight (emphasis added) …; high interest rates, that money has been easy (emphasis added).”

“Japan’s recent experience of three years of near zero economic growth is an eerie, if less dramatic, replay of the great contraction in the United States. The Fed permitted the quantity of money to decline by one-third from 1929 to 1933, just as the Bank of Japan permitted monetary growth to be low or negative in recent years. … The United States revived when monetary growth resumed …”

“The Fed pointed to low interest rates as evidence that it was following an easy money policy and never mentioned the quantity of money. The governor of the Bank of Japan in a speech on June 27, 1997, referred to the ‘drastic monetary measures’ that the bank took in 1995 [a cut in the discount rate from 1.75 percent to 0.5 percent] as evidence of ‘the easy stance of monetary policy.’ He too did not mention the quantity of money.”

“After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy (emphasis added) of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.”

Who suspected that Milton Friedman was an advocate of quantitative easing, and Central Bank intervention for deeply depressed economies.

Its been said “There are no atheists in foxholes;” Apparently, the economic equivalent is “There are no true Free Marketers during depressions” either . . .

>

Sources:
Reviving Japan
Milton Friedman
Stanford University Hoover Digest, April 30, 1998
http://www.hoover.org/publications/hoover-digest/article/6549

Benjamin Strong and Milton Friedman – Ironically, Something in Common?
Paul Kasriel
Northern Trust, September 19, 2011
http://bit.ly/run2H0

Category: Currency, Federal Reserve

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “QOTD: Reviving Japan or Reviving USA ?”

  1. Petey Wheatstraw says:

    Tangentially related, but more towards the WTF?/Context is Everything, Dept:

    http://www.nakedcapitalism.com/2011/09/guest-post-will-tokyo-be-evacuated-due-to-fukushima-radiation.html

    On a positive note: Don’t worry, kids, if we ignore this or sweep it under the rug, maybe it’ll go away.
    ____________

    On BR’s comments:

    “There are no true Free Marketers during depressions”

    I’m sure you meant to type an ‘R’ not a ‘D’.

  2. mcdermott says:

    Hi Barry. Just to clarify, does your last line imply that you believe we are in a depression? Or did that just refer to Japan? For the record, I think we are. Thanks.

    Jim

  3. mark says:

    Increasing supply is a necessary but not sufficient condition. The money must have velocity as well.

    If the extra supply of money is simply put back into the bank as deposits and not spent and the banks aren’t lending it out for investment or spending on houses and cars etc then there is no velocity of money

    See here: http://articles.latimes.com/2011/sep/17/business/la-fi-low-yields-banks-20110918

    “Bank deposits soar despite rock-bottom interest rates
    Consumers worried about the economy are pumping cash into checking, savings and money market accounts. But the banks don’t need their money and have slashed interest rates to discourage customers.”

    And here: http://krugman.blogs.nytimes.com/2011/09/19/all-banked-up-with-nowhere-to-go/

    “You can also see this in the data. Look at the velocity of M2 — the ratio of nominal GDP to Milton Friedman’s preferred measure of the money supply. Monetarism rested on the assumption that there was a reasonably stable relationship between M2 and GDP; what’s happening now is that deposits are piling up but going nowhere, so velocity (which rose in the 90s thanks to the rise of shadow banking) has plunged”

  4. Petey Wheatstraw says:

    mark:

    We have a lake where there should be a river.

    http://www.youtube.com/watch?v=xbJQT2eDseA

  5. [...] Milton Friedman was for QE in Japan…  (TBP) [...]

  6. toba says:

    Steve Keen at debtdeflation.com has written about how Bernanke subscribes to Milton Friedman’s theory of the great depression. Friedman’s monetarist theories are bunk. Neither he nor Bernanke seem to grasp that no matter how much money they print, the debt overhang from the credit bubble is still there and is THE reason we are in a long depression.

  7. d4winds says:

    “In terms of the quantity theory of money, we may say that the velocity of circulation of money does not remain constant. ‘You can lead a horse to water, but you can’t make him drink.’ …You can tempt businessmen with cheap rates of borrowing, but you can’t make them borrow and spend on new investment goods.”

    –Paul Samuelson, 1948

    In the current case, business fixed investment for large cos. is up and close to pre-recession levels, but BFI remains low for small cos, who are the job-engine and whose main capital source is bank loans. Also, low interest rates have not tempted the economy’s best foul-weather friend–the homeowners–to buy for obvious reasons. The Federal Reserve has expanded its balance sheet enormously, as it did in the Great Depression, but with similar anemic results in M2 expansion. Friedman might be right about more money being the desirable elixir, but blaming the Fed for it ignores the bank (non-) lending portion of the money creation process as well as the velocity. The “horse being led to water” is bank lending, both for small cos. expansion and for mortgages. Revised credit standards impact both of these sources of bank lending, but the biggest drivers are fears of further stagnation/recession for the 1st and a very slow adjustment to/in household balance sheets/the RE market for the second.

  8. wally says:

    I think we know more about quantitive easing now than when Friedman made his assertions or when Bernanke made his assumptions. For instance, we now know that the effects are not uniformly distributed through an economy and we know the increased monetary base can simply result in hoarding, in speculation by monied groups and by investments in other economies where it brings no benefits to the country doing the easing. (Actually, some people knew this all along and the result was predicted by many bloggers and posters, including on this blog).
    Back to the drawing board. Once again, unexpectedly, the simple solutions isn’t so simple after all.

  9. farmera1 says:

    I keep thinking back to long held ideas. The debt over hang is the prime driver behind the current economic problems we have.

    http://www.bullandbearwise.com/DebtOverGDPChart.asp

    So now outstanding debt is some 350% of gdp, the previous high was 190% in 1930. As debt was destroyed (written off) during the great depression, the ratio of debt/gdp went down. Even during WWII the ratio didn’t even approach current levels.

    When a country is in an excessive debt situation (levels of debt that can never be paid back) there are really only two ways out:

    1. Write off massive amounts of debt much like what happened in the 1930s.

    2. Inflate your way out and there by debasing the currency. That way we can afford to pay of China, the ME and the rest of the world with freshly printed “money”. All those trillions in debt we owe China et al don’t seem so high, when we can pay them off with freshly printed money.

    The FED seems to be attempting to finesse an inflation, but I’m not sure the FED has the power to do so (despite Bernanke’s comments about helicopters dropping money). Banks, the public and governmental policy don’t seem to be cooperating with Ben. The State governments by laying people off/Federal government like wise by balancing the budget efforts /and the velocity of money (as in no demand) all seem to be working against Bernanke.

    So without demand driven by inflation (as in the FEDS easy money efforts)the direction seems to be deflation despite all of Ben’s helicopters, and printing machines.

    ~~~

    BR: No doubt, the Greenspan Fed is the spark that lit the conflagration

  10. gman says:

    In today landscape…Milton is a “socialist”! Ignore what BOTH Keynes and Friedman say about depressions. Neo-Austrian gold buggery uber alles! Austerity..purge the rottenness, liqidate above all DEFLATE!

    PS It should be noted when people go on those type of rants they are either massively long bonds or paid by somebody that is.

  11. theexpertisin says:

    Ma ny hark the clarion call for more QE.

    One notable difference between Japan (warts and all) and the US. The culture of Japan is dominately “all for one and one for all”. Ours? “Winner take all”. Our QE appears to be nothing motre than a political slush fund for the party in power.

    I submit that any QE would have/have had dramatically different results for Japan and the US.

  12. discusdriver says:

    If I keep on drinking, I’ll never be hungover

  13. Petey Wheatstraw says:

    ‘You can lead a horse to water, but you can’t make him drink.’
    ______________

    When you have 300 million horses, you don’t really need the one you’ve been whipping to drink (or eat, for that matter) — just sent it off to the glue factory, and harness another.

    To see TBP, you have to step back and see beyond your blinkers. If you do this, you’ll realize that what is happening, via fiscal and monetary policy, isn’t about the economy, at all.

    We have strengthening dollars, concentrated among a few favored holders, while those not in favor must perpetually borrow in order to continue toward the fictitious and illusory “American Dream.” (In the context of horses, the “dream” is a carrot, but not a real carrot — it’s a wax replica, a.k.a., fiat dollars).

    Why?

    Concentration of wealth and power.

    Keep in mind that the average horse has a brain the size of a freekin’ walnut.

    We’re not being “rode hard and put away wet,” as the old saying goes. We’re being rode hard and put down.

  14. [...] –Friedman on Monetary Policy: Paul Kasriel says Milton Friedman would be arguing for more quantitative easing. “If Milton Friedman were still alive, I suspect he would write another Hoover Institution essay, this one entitled, “Reviving America,” in which he would recommend to the Fed that it purchase securities on the open market such that the combined credit of the Federal Reserve and private monetary financial institutions grow at a steady annual rate closer to 7.4% than zero. And then Friedman might end his essay with: “I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.” Unfortunately for America, Milton Friedman did pass away and, regrettably, his legacy was short-lived.” (Hat tip, Barry Ritholtz) [...]

  15. ES says:

    > Increasing supply is a necessary but not sufficient condition. The money must have velocity as well.

    Bingo. And why is there no velocity? Because the newly created money is in the wrong hands – at the banks and financial insitutions but they cannot lend because the potential borrowers are already saddled with too much debt. What is needed is a premanent reduction of taxes (aka fiscal stimulus) to the middle class, then they will start spending. Taxes on the middle class are too high and they get no benefit from various QEs.
    Corporations are also flush with money but they don’t spend because there is no demand for goods. And we are back to the strapped middle class. Any stimulus program should target poor and muiddle class, only then there is a chance to get out of the downward spiral.

  16. farmera1 says:

    I keep thinking back to long held ideas. The debt over hang is the prime driver behind the current economic problems we have.

    http://www.bullandbearwise.com/DebtOverGDPChart.asp

    So now outstanding debt is some 350% of gdp, the previous high was 190% in 1930. As debt was destroyed (written off) during the great depression, the ratio of debt/gdp went down. Even during WWII the ratio didn’t even approach current levels.

    When a country is in an excessive debt situation (levels of debt that can never be paid back) there are really only two ways out:

    1. Write off massive amounts of debt much like what happened in the 1930s.

    2. Inflate your way out and there by debasing the currency. That way we can afford to pay of China, the ME and the rest of the world with freshly printed “money”. All those trillions in debt we owe China et al don’t seem so high, when we can pay them off with freshly printed money.

    The FED seems to be attempting to finesse an inflation, but I’m not sure the FED has the power to do so (despite Bernanke’s comments about helicopters dropping money). Banks, the public and governmental policy don’t seem to be cooperating with Ben. The State governments by laying people off/Federal government like wise by balancing the budget efforts /and the velocity of money (as in no demand) all seem to be working against Bernanke.

    So without demand driven by inflation (as in the FEDS easy money efforts)the direction seems to be deflation despite all of Ben’s helicopters, and printing machines.

  17. some things say it ~All..

    toba Says:
    September 20th, 2011 at 8:01 am

    Steve Keen at debtdeflation.com has written about how Bernanke subscribes to Milton Friedman’s theory of the great depression. Friedman’s monetarist theories are bunk. Neither he nor Bernanke seem to grasp that no matter how much money they print, the debt overhang from the credit bubble is still there and is THE reason we are in a long depression.
    ~~~
    Petey Wheatstraw Says:
    September 20th, 2011 at 9:25 am

    ‘You can lead a horse to water, but you can’t make him drink.’
    ______________

    When you have 300 million horses, you don’t really need the one you’ve been whipping to drink (or eat, for that matter) — just sent it off to the glue factory, and harness another.

    To see TBP, you have to step back and see beyond your blinkers. If you do this, you’ll realize that what is happening, via fiscal and monetary policy, isn’t about the economy, at all.

    We have strengthening dollars, concentrated among a few favored holders, while those not in favor must perpetually borrow in order to continue toward the fictitious and illusory “American Dream.” (In the context of horses, the “dream” is a carrot, but not a real carrot — it’s a wax replica, a.k.a., fiat dollars).

    Why?

    Concentration of wealth and power.

    Keep in mind that the average horse has a brain the size of a freekin’ walnut.

    We’re not being “rode hard and put away wet,” as the old saying goes. We’re being rode hard and put down.
    ~~~

    It’s the ‘Debt Overhang’ that needs to be written down/off..too many ‘Financial Claims’, all Booked as ‘Good’, is Fantasy..

    Illusion Kills…

  18. DeDude says:

    It’s all about monetary momentum

    Monetary momentum = money mass (amount) x monetary velocity

    Central banks can push more money but have little if any ability to give it velocity. Only government can force velocity onto money so they hold the key to solving the problem. Alternatively we need a jubilee to clear all debt so that consumers and businesses stop hoarding money (to reduce debt) and begin spending it again.

  19. streeteye says:

    IIRC, Friedman advocated a strict money growth rule, constant money supply growth at a rate equal to the long-run growth in real GDP, year-in, year-out, regardless of business cycle variations in demand for money and interest rates.

    This would lead to interest rates rising when the economy was strong and falling when it was weak, and thus be a countercyclical policy.

    Irrespective of whether such a strong focus on the quantity of money is warranted, since it’s subject to a lot of technical and definitional vagaries, I don’t think Friedman was saying anything inconsistent with that here. He was just pointing out that when money demand plummets in a deep recession, lowering rates to zero isn’t enough, something like QE is necessary to keep money growth on its long-run path.

  20. diogeron says:

    Yes, it is true that “it has been said there are no atheists in foxholes” but that doesn’t make it true. To wit,
    http://en.wikipedia.org/wiki/Military_Association_of_Atheists_%26_Freethinkers

  21. [...] –Barry Ritholtz, The Big Picture [...]

  22. bulfinch says:

    DeDude says: “Alternatively we need a jubilee to clear all debt so that consumers and businesses stop hoarding money (to reduce debt) and begin spending it again.”

    When we call consumer savings ‘hoarding’ it’s a form of propaganda. Consumer savings is a good thing, imo.

  23. DeDude says:

    bulfinch;

    As with all these general “rules” they have to be placed in content. If there is plenty demand and the economy is growing then savings (or paying down debt) is a good thing. If the economy is stalled and capacity utilization is low then saving is a bad (destructive/counterproductive) thing.