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Monetary Policy

7 min read

Part of Markets and money.

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Every episode (4)

Who argued it

Don Boudreaux · Richard Epstein · Sebastian Edwards · Stan Larimer

Inflation · Antitrust · COVID-19 · Climate Change · Supreme Court · Decentralization

Background

Government policy, jobs and the money supply

In a discussion of jobs, the deficit and the debt ceiling, Bob Zadek told Don Boudreaux that unemployment remained above 9% and that there was pressure on government to “create jobs.” Zadek offered the hypothetical that government could double employment by cutting the minimum wage in half, or hire 10,000 men to dig a hole and another 10,000 to fill it in, and said that government does not create jobs but can only create an environment where businesses do. Boudreaux agreed, calling it a myth that government spending and government monetary policy create jobs, and said entrepreneurs create jobs and create better-paying ones the freer they are. He added that government can “create jobs” by reducing regulation, but that this is like saying government has stopped destroying jobs The Second American Revolution – NOW (2011).

Bitcoin’s capped supply against the dollar

Introducing the supply question, Zadek said the supply of dollars is controlled by government and asked what controls the amount of Bitcoin. He observed that a dollar bill says it is worth a dollar but does not always buy the same quantity of goods, so holding dollars is a decision to forego yield and to suffer possible depreciation through government action and inflation. Stan Larimer answered that the value of Bitcoin is limited for all time to 21 million coins, that about 16 or 17 million had been issued, and that the rest are issued about 12 and a half every 10 minutes in a process that will take perhaps 100 years. He described this as a contract with all holders of Bitcoin, enforced by the robots that run the system, and said Bitcoin is slightly inflationary, not as bad as the dollar, with the new coins paying to operate the system The Basics of Bitcoin & Blockchain with Stan Larimer (2018).

On price, Larimer said Bitcoin’s inventor, Satoshi Nakamoto, introduced it as a system for keeping track of tokens and suggested it could be a digital currency someday; early testers traded 100,000 Bitcoins for $5 or so, and demand later became more than speculative as people used it to send money to the other side of the planet. He said Bitcoins recently almost hit $20,000 apiece and were back down to $15,000 or something, with value driven by market demand similar to gold and silver The Basics of Bitcoin & Blockchain with Stan Larimer (2018).

Volcker, commodity prices and the Fed

Charlie Deist, filling in for Bob, asked David Henderson about a blog post linking to the monetary economist George Selgin, who had read Steve Moore’s op-ed and was left scratching his head. Henderson said Moore claimed Paul Volcker, the person who broke the back of inflation, looked at commodity prices as his signal for monetary policy; Selgin traced the idea back to Art Laffer and found a contradiction between what Laffer seemed to imply recently about meeting Volcker and persuading him, and what Laffer wrote in 1983 in Reason magazine. Henderson called it made-up history, somewhere in the middle David Henderson on Trumponomics, Deficits, and Immigration (2019).

Deist described commodity price targeting as paying closer attention to a bundle of prices such as oil, copper and other minerals, and noted deflation in that bundle since the Federal Reserve began to tighten through interest rate hikes. Henderson declined to explain Moore’s reasoning, saying he is not Mr. Monetary Policy and did not know David Henderson on Trumponomics, Deficits, and Immigration (2019).

Interest rates as a measure of policy

Henderson said the Fed has very little control over interest rates: it targets the federal funds rate, the rate on money lent overnight, and does so not by lending or borrowing in that market but by buying or selling bonds to put more or less liquidity into the economy and thereby affect the rate indirectly. He said it is a bad idea to look only at interest rates when judging Fed policy, and cited Scott Sumner, his colleague at EconLog and a strong advocate of nominal GDP targeting, on the Fisher effect, the effect of expected inflation. In the Great Depression, Henderson said, interest rates were really low and people concluded the Fed must be loose, when in fact policy was very tight because people expected deflation and got it, which lowered nominal rates David Henderson on Trumponomics, Deficits, and Immigration (2019).

Deist added that when the Federal Reserve signaled during the recession that it intended to keep interest rates low for a long time, that could have a self-defeating impact by signaling it was not committed to generating the historical average for inflation David Henderson on Trumponomics, Deficits, and Immigration (2019).

What the Fed is for, and who should sit on it

Deist noted the recent appointment of Stephen Moore, a supply-side economist with a master’s degree who had argued for lower taxes for decades, and asked why Moore might not be the best person for the job. Henderson said he and Moore are friendly but that he does not think Moore knows enough about monetary policy, and that he would rather see someone really critical of the Fed who really knows Fed policy, naming Larry White at George Mason University, who wants to end the Fed, and George Selgin. Henderson called the Fed very snobby and recounted being invited to speak at the annual meetings of the San Francisco Federal Reserve Bank, where he was told the panel would be recorded and put online, and where an exception was made the year he gave it—which he attributed to a slide saying that if government is not good at figuring out the right amount of steel in the economy, central planning being a bad idea, why would it be good at figuring out the amount of money. He said Moore would be good as Assistant Secretary for Economic Policy, pushing for capital gains tax cuts, and that putting him at the Fed would be a wasted slot David Henderson on Trumponomics, Deficits, and Immigration (2019).

Money creation and historical knowledge

In a discussion of Austrian economics, Jeff Deist said most economists today do not understand much about economic history, that brilliant young people come out of PhD programs and business schools with superb number-crunching skills but without a sense of history, and that they do not understand hyperinflationary events of the past, the workings of collectivist societies, or much of money creation or monetary policy. He said many people under a certain age have never seen a bear market, and warned against thinking that America’s wealth is baked into the cake and that incentives do not matter—that anything can be done at the monetary policy level or the fiscal level without screwing it up Austrian Economics Triumphs (2021).

Across episodes

The episodes show no development across episodes: the 2011 episode treats monetary policy as one half of the claim that government creates jobs, the 2018 episode contrasts a government-controlled dollar supply with Bitcoin’s capped supply, the 2019 episode examines the Fed’s tools and personnel, and the 2021 episode notes that money creation and monetary policy are poorly understood, with each guest advancing his own point rather than answering an earlier one.

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