 Today we're talking about the fallacies of market monetarism. Many of you have probably heard of this. I'm going to spend a bit of time on the front end of this just explaining what this is, what the terms mean. This guy right here is Scott Sumner and he's actually humble about it and so I will give him more credit for this than he himself would take. So the stuff we're going to talk about, there are things in the literature going back at least to the 80s that are the precursors of this view, the sort of doctor now that has been christened market monetarism. But Scott Sumner, if you had to pick somebody who has single-handedly brought this to the attention of what's called policy makers and academic economists who argue on social media and have blog posts and whatnot, he's the one who's done it. So just to give you a quick taste of where we're going with this. So the financial crisis hits in the fall of 2008. The Fed, as those of you who saw my talk yesterday and I'm sure other talks may have alluded to this, the Fed engaged in unprecedented monetary expansion charts looking like that in terms of what the Fed was doing with what's called the monetary base. So in terms of the Fed just pumping money in through the channels that the Fed uses, it was literally unprecedented. They doubled the monetary base in a matter of months, for example. And so a lot of people were saying, so there were two main responses. The sort of left-leaning economists, Keynesians were saying things like, oh, the economy's in such a hole right now. Yeah, it's better than doing nothing, but what the Fed's trying to do, they're pushing on a string. That's why we need to have huge government budget deficits because monetary policy is out of ammo. They were talking like that. Like, yep, the Fed's really trying hard, but they can't do anything at this point. There's more right-wing, conservative, libertarian types, mostly a lot of free-market economists, including not just Austrians, but more conventional, like Heritage Foundation types, that sort of thing. They were flipping out saying, oh my gosh, look at these charts. I can't believe how much money the Fed is dumping in the economy. Are you insane? Hey, this was a housing bust. These are real problems. And it wasn't just Austrians, by the way, using that language, even though the Austrians had that tradition. There were other economists saying similar things like, if the problem was we built too many houses, you don't fix that by just pumping in a bunch of money. They were talking like that. And so again, they were both agreeing what the Fed was doing was a lot, and it was just some said it's too little, too late, and the Austrians and people like that were saying it's too much, so you don't want to be doing that. And so what was interesting is in that context, Scott Sumner comes along and starts saying in the late 2008 on his lonely little blog, and I'm not making fun of him. I'm saying it's sort of like a David and Goliath story, that he was just sitting there as a voice in the wilderness saying, the problem, the reason we're in this mess right now is because the Fed has been ridiculously tight. This is, Ben Bernanke right now has the tightest monetary policy since the Hoover administration, referring to Herbert Hoover for our foreign students back, actually I say that, but probably the foreign students know more about US history than Americans back in the 1930s. So in case you don't know, Herbert Hoover was the person, the president, when the Great Depression was struck in the U.S., and he is castigated as the do-nothing president, whatever, and that's very misleading, of course. But in any event, so Scott Sumner was saying, no, far from the Fed doing too much or having reckless abandon here or doing the wrong thing, it's not doing enough. That the reason right now the economy is in such crisis is because the Fed has, for some reason, enacted the tightest monetary policy since the 1930s. Okay, and so for a while, a lot of economists are, what, are you out of your mind? Like, do you know how charts work, Scott? And then, but then over time, he gradually won a lot of economists over in such that now plenty of respectable mainstream, like at the Jackson Hole Monetary Policy Conferences that they have every year that the Fed puts on, that they're, like, over time, more and more of the academic papers that were presented were either, like, they started just hinting at some of the stuff he'd been talking about since 2008, and then eventually, like, just openly, you know, it was a whole kit and caboodle where they were just openly advocating policies that were right out of his playbook. Okay, and like I say, it wasn't just Quincy. He was the one, like, I saw it happen in real time. The whole time, I'm telling everybody, no, this guy is nuts. And there's more and more people started agreeing with him. And I said, no, no, your initial reaction was right. He's nuts, but he won people over. Okay, and part of what I think helped that happen for those of you saw my talk yesterday is that people who thought what the Fed was doing was insane and was going to, you know, crash the dollar. That didn't happen for several years. And so him saying, no, no, the Fed's been too tight. The Fed's been too tight. We're not going to have massive CPI. Don't worry about it. The Fed's too tight. It started to look like he was right because some of his empirical predictions about what was going to happen came true. All right, now having said it, let me just make sure I don't forget to say this. He totally missed the boat when it came to the recent inflation. Okay, so it's, you know, in terms of, so don't take away from this that yeah, his predictions are right. And I just think that his framework is messed up. Okay, so and actually there is a quote later on that I'll read from him to show you that. Okay, so in last caveat before we dive into this, let me just mention, so even though like I'm using language like, oh, he's insane, things like that, he's not stupid. All right, there's a distinction. Okay, like Hannibal Lecter, arguably insane, he's not a dummy. Okay, as far as I know, Scott Summer doesn't eat people. I don't misunderstand. But so for example, you know, many of you know that I had this standing debate challenge to Paul Krugman. I also wanted to debate Sumner. And he was willing to do it and I actually put that off. I told him that no, if I were going to debate you, I would need to take a few months to really get ready. Because if I just walked into it, you know, I would probably lose, not in the sense that he would be right and I would be wrong, but he has a command of the fact he's, you know, got a framework that's really internally consistent. He doesn't contradict himself a lot. It's just where his logic takes him, the output of that framework to me is obviously crazy to say, Scott, don't you know you're doing something wrong and you're reasoning if this is the answer and he says, no, this is what, you know, a radical new approach looks like is at first it sounds crazy and then over time everyone agrees with me, right? So that's where he's coming from. So again, don't misconstrue some of my glib remarks is meaning that I think he's a dummy. He's not. He's actually very formidable and in a sense, more dangerous if that's the word you want to use because in addition to him, in my opinion, having really bad views on monetary policy, he also calls himself a libertarian and he went to the University of Chicago. So he's very free market oriented. He's very familiar with those arguments. And so he's more persuasive to people who otherwise may have been Rothbardians. Like he actually, I think, converted a lot of people who their instinct was to say, wow, Bernanke's nuts. You can't just be dumping money in the economy, let markets decide interest rates. And Sumner's perspective, I think, captured a lot of those people who they would have never become accolades of Paul Krugman. And Krugman's variance of this is why QE is good. From a Keynesian perspective, they wouldn't have trusted Krugman, whereas Sumner has gotten many of them to come over. So that's the context of where we're coming and why in this talk I'm going to be focusing a lot on his views. OK, so just again to give you a quick outline of what we're doing. So first, I'm going to explain to you some of the history of original monetarists and the single name most associated with that school of thought is Milton Friedman. And in particular, Friedman argued that he and Anna Schwartz overturned the conventional wisdom about what caused the slump in the 30s vis-a-vis monetary policy. And also, he then used that framework or that perspective to argue about what the Bank of Japan had been doing wrong when they had their so-called lost decade. And then once you get that, you'll understand now how Sumner's coming along. And he thinks he's doing that same historical revisionism when it comes to what the heck happened with what's called the Great Recession. So there's the Great Depression of the 30s. And then a lot of people call the crisis and slump that followed the 2008 meltdown in the markets, they call that the Great Recession. And so Sumner thinks a similar thing happened. That just as economists almost universally misdiagnosed what central banks did wrong in the 30s, and it took Milton Friedman and Anna Schwartz to come along and correct them and set the record straight, that's what Sumner thinks he's doing. And like I said, he's convinced a bunch of economists to think that, oh, yeah, Sumner's right. It was that the Fed was too tight in 2008. Not that it was ridiculously loose and that it was just setting up another crash. OK, so in particular, if you say, so Sumner doesn't think, so Friedman thinks interest rates are a misleading indicator. He wanted to focus on money growth. Sumner's going to say even money growth is a misleading indicator. The criterion you should use is what's called NGDP growth. And I'll focus more on that when we get to it. And then, so that's why they're called monetarists because they're in the tradition of the original monetarists. But then what's the term market? What's that doing? It's because he doesn't think central bank experts should be the one setting policy, or at least not using discretion. He thinks they should have guidelines in place where they rely on the wisdom of crowds and use market forecasts in order to see if the Fed's on target. And then lastly, so once I explain to you where they're coming from and you understand that's why it's called market monetarism and so forth, and how could he possibly be arguing if the Fed's been too tight from 2008 to 2012? Once you understand it, then I'll go through and explain from an Austrian perspective some of the problems with that. Last thing I'll mention here is, again, all this stuff, I have a whole chapter on it in my book, Understanding Money Mechanics. And then that's, there's a PDF of that online too. You don't need to get the physical thing. So if you want to learn more about this, you can go read that book chapter. Okay, so Milton Friedman, and again, the monetarist school is associated with him. He didn't found it, but he's one of the modern exponents of it, proponents of it. So what he argued was, so here's the conventional wisdom. In the 1930s, interest rates were very low. And so for Keynesian types and other economists, they thought, okay, well, the way you judge monetary policy to see if it's easy or tight is or loose or tight, those are some of the adjectives you might use, they said, well, what does the central bank do when it wants to provide stimulus, when it wants to become easy and possibly risk too much price inflation, but at least try to help the economy is you cut interest rates. And so therefore they thought, if interest rates are really low in the early 1930s, central banks are doing what they can. It's just not enough. The market economy was in such a whole that central banks were impotent and they were using metaphors like pushing on a string. So if you think about that, you could pull a string and that would do something, but if you started pushing on the string, the thing that the string is attached to is just gonna sit there, right? You push on the string and just the string's gonna get, I don't know, it would fold up. That's the technical term. And so you understand where they're coming from there? So they're saying that that was the situation, they had terms like liquidity trapped and things like that, we don't need to get hip deep in the Keynesian framework, but that's why they were saying, oh yeah, central banks were out of ammo. They did what they could, but once you get into a certain rut, then expanding the monetary base or whatever, that doesn't do anything. Another way of looking at it is they were saying, at some point once interest rates get short-term interest rates hit 0%, all that central banks doing when it engages in like QE, for example, is they're buying treasuries and then giving reserves to the people in the private sector, but if the yield on treasuries was basically 0%, at that point they're just swapping sort of government liabilities that yield 0%, and so it's basically just an asset swap of assets that are almost interchangeable. And so that's why a lot of Keynesians think once nominal interest rates short-term get close to 0%, that this conventional monetary policy loses traction. That's a phrase they would use because at that point you're not doing anything, you're just changing the composition of assets on the books of institutions in the private sector that don't really, they're not very different. So that's what the lesson was from the 1930s as far as many Keynesians were concerned that central banks did what they could, they ran out of ammo and then that's why you needed the central governments to come in and use fiscal policy and run big budget deficits, that's what they thought. And so then Friedman and Schwartz come along with their book, A Monetary History, and in the period where they're talking about the Great Depression, they advanced this novel thesis and they said, no, it wasn't that central banks did what they could and just ran out of ammo, they were too tight. And so for example, in the U.S. case, they said, if you look at things like M1 and M2 from I'm making these numbers up, this is roughly correct, from like the end of 1929 to 1932, M1 and M2 contracted by like a third in the United States, right? So the money in the hands of the public shrank by about a third. And so they're, so see, so it's not surprising that wages and prices also collect when the money stock fell by a third over those few years. And so clearly Friedman and Schwartz are arguing, it's not that the Fed was doing too, or was trying too much and ran out of ammo, they fell asleep at the wheel. And so if you're wondering, it's not that the Fed was sucking money out of the economy, it had to do with the fact that there's fractional reserve banking. And so the public was panicked, there were a lot of bank failures, as you may know. And so the public was going to their bank and pulling their money out of their checking accounts. And then if you understand how that process works, by the public wanting to hold actual currency that caused M1 and M2 to shrink and the Fed didn't do enough to offset that. And so that was the allegation that Friedman and Schwartz were making, that was the sense in which the Fed was too tight. And then they were saying, oh, but interest rates were really low. And they were like, well, that's not surprising, right? Because prices and wages are collapsing, so the nominal interest rate doesn't need to be very high. And also the economy was awful, it was the Great Depression. So real interest rates were low, like for fundamental reasons. And then you didn't need to have a component for the purchasing power adjustment that you normally would, where oh, if the money I'm getting paid back after a loan is worth less, and so I gotta have a higher nominal interest rate to compensate. It's the other way around, when prices are falling, you can settle for a lower nominal interest rate as a lender, because you're getting paid back in stronger dollars. And so they were arguing the fact that interest rates were really low in this period doesn't mean, oh, see, the Fed was really loose. On the contrary, again, they were saying the Fed fell asleep at the wheel. And so then that explanation gradually took hold. And so more and more economists said, oh, the reason the early 1930s was so bad was that the Fed had actually unwittingly a very passively tight policy. So it wasn't that the Fed set out to crash the economy, but for various institutional reasons, like one guy died in the late 20s and they were saying there was a power vacuum. So they had a lot of like anecdotes and personal drama in their accounts. So it was a gripping story, but they were arguing that for various reasons, the Fed let the quantity of money in the hands of the public collapse on their watch. And so duh, of course we fell into the great contraction. Okay, so that's what he said about that. And then later on again, the lost decade of Japan, a long time later, Friedman made a similar analysis that people were looking at the low interest rates that the Bank of Japan had. So look, the Bank of Japan's doing what it can, just not enough, something else is going on. And Friedman said, no, if you look at the stock of money held by the Japanese people, that's, it's certainly not rising. I don't know if it was actually falling. And he's saying, so it's a similar thing, that low interest rates are misleading. So let me just read you a quick quote. So this was from Friedman writing in 1997. I think this was in the Wall Street Journal. He says, initially higher monetary growth would reduce short-term interest rates even further. However, as the economy revives, interest rates would start to rise. That is the standard pattern and explains why it is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight as in Japan. High interest rates, that money has been easy. Okay, so that's the opposite of normally what you would think. So Friedman's saying, is a general rule, if I don't know anything else about the situation and you tell me that there's an economy and right now interest rates are really high, I'm gonna tell you, I bet you their central bank has had loose money, because once that feeds into the system and things adjust, inflation expectations are higher, because they're pumping in a bunch of money. And so people build that in and so they insist on higher nominal interest rates because of the inflation, the purchasing power component. So in general, Friedman's saying that when I see high interest rates, I think that's an economy where the central bank has been loose. And on the other hand, if I see an economy with very low interest rates, then I think the central bank in that economy has actually been really tight and that's caused the economy to crash. So real rates are low and inflation expectations are also really low or even negative. And so that's why you don't need that purchasing power so that's why nominal rates are real low. And again, notice that that's kind of the flip of the normal analysis where you think when the central bank wants to loosen, it cuts rates and when it wants to tighten, it jacks rates up. So that's where, how Friedman handled the Great Depression in Japan. And so you can see the analogy with the so-called Great Recession. Okay, so Sumner takes it one step further and he argues that, okay, just as interest rates aren't a good indicator, he says you also can't look at things like growth in the monetary base to see whether the Fed's been too tight or too loose. And I'll skip some of the arguments in between but the punchline is, what does he think the right indicator is is he says the growth of NGDP. So that stands for Nominal Gross Domestic Product. And it's loosely summarized, it's like total spending on final goods and services. Okay, so you guys probably know what real GDP is. So this is that without an adjustment for changes in prices. So normally as economists, we automatically make it real because we think that that's more fundamental and that the rest of it's just in terms of, oh yeah, the changing purchasing power of money is just something to add it on top of that. But for Sumner, he said no, that the actual thing out there in the world is actual expenditures in dollars and you can record those transactions. So for him, that's more realistic and accurate. Like it's not a model, it's you can go measure that. And he says for him, that's the criterion. And so he's saying, I don't care what else is going on under the hood. End of the day, if nominal GDP is growing by less than 5%, then he thinks that's tight policy. And on the other hand, if nominal GDP is growing by more than 5%, he thinks that's loose policy. Where does the 5% come from? It's, he thinks that real growth is roughly 3% on average and that he thinks a 2% increase in the general price level is about optimal if you had to pick something and just run with it and I won't get into why. And so that's where he comes up with the 5%. So he's saying, over time 5% a year total expenditures on final goods and services technically should increase about 5% a year. And if the Fed's doing that, that's all we can ask of it. Okay, now let me just mention, so notice that's not inflation targets. I wanna make sure you understand his framework. So if there were like an earthquake and the quantity of real output collapsed in his framework, that would mean probably prices would go way up, right? So measured CPI inflation would be real high, but because there's not as many real goods to buy, the fact that the unit price is real high just means the total expenditure, the volume of expenditure still would just grow 5% a year. Right, so that's how he would handle, or go on the other way, if there's productivity increases and real output's growing very rapidly, growing at 10% a year, then you would have negative consumer price inflation, right? The unit prices of goods would fall in some nurses, that's fine. Again, it's the volume of expenditure. Friedrich Hayek actually has some proposals that are similar, at least on that dimension in case some of this sounds familiar to you guys, all right? So again, it's not that Summers is making all this stuff about a nowhere, there's other economists that talk about certain slices of what his world view is. Okay, so that's what his position is. Now if you say, okay, fine, but where's he coming from? Why is that the thing he picked? It has to do with sticky wages and prices. So if people expected a situation where the NGDP would grow at that amount, they would sign long-term contracts, right? So employers hire workers with built-in expectations about certainly we're not gonna slash your nominal wages next year, or it's difficult to do so. People buy houses with mortgages and they assume they can make a given mortgage payment into the future. And so if all of a sudden nominal GDP shrinks, then it's like there's not enough money to go around to make all those payments. And so it's painful and there's a contraction. On the other hand, if there's more money flowing around than is necessary to finance those built-in expected increases in payments, then prices are gonna rise and get the problems of just too much money that he would agree with the standard reasons as to why too much inflation is bad. Okay, so that's kind of his framework. And so that's why they think they're in the tradition of the old school monitors because again, in terms of the Great Recession, interest rates were real low. Bernanke cut interest rates down to zero. Monetary growth was through the roof. You remember some of those charts, it was unprecedented. And yet some are saying, no, no, it was unprecedented or not unprecedented. Since the 1930s, the tightest monetary policy because he said NGDP growth was actually negative for a while and it was certainly below 5% for several years. Okay, and then I've alluded to this. Where does the market part come in for market monitorist? Because they say it's not that we want central bank experts to try to make NGDP grow at 5%. The real thing if Sumner gets his way is there's a futures market in NGDP contracts for like six months out or 12 months out. And then it's gotta be that the Fed goes into that market and buys and sells until the point at which people in the market believe that NGDP 12 months from now will be 5% higher than it is right now. Okay, so we don't need them doing anything. It's like you have a computer running the central bank. So that's where the market aspect comes in is Sumner. And again, you see what I'm talking about where Krugman normally would not say, oh, markets are smarter than technocrats. Krugman thinks he's smarter than a billion stock traders. And so whereas Sumner does, he appreciates, oh no, market prices contain information, you can't trust central planners. He's got that free market framework and he knows a lot of that stuff. And it's just in this particular case, that's one of the ways it comes out is he's saying, oh yeah, I don't like central bankers either. They don't know everything, they're not infallible. And so let's leave it to the market to determine monetary policy. So he uses that rhetoric to make it look like this is a market solution to setting interest rates. Okay, and then like I told you, so one of his views, I didn't know if I was gonna elaborate on this earlier. So again, the takeaway is why Sumner is such a big deal and he is convinced a lot of people is that for a while everybody agreed the Fed was doing a lot, some just thought it wasn't enough, other people thought it was way too much and then Sumner comes on and he is convinced more and more people that the Fed and other central banks had very tight money from like 2008 to 2011, let's say. Because if you looked at NGDP growth, it was slower in that stretch. Okay, let me see, okay. Okay, so now that I've established what the framework is and so on, let me just spend some time going through some of the problems and we may have time at the end for a question or two. Okay, so here I'm doing now from an Austrian perspective, what are some problems with that framework? I've just explained to you guys. Okay, so for one thing, so I understand why they're calling themselves monitorists because you can see the analogy but actually realize that they don't look at money at all. That unlike Friedman and Schwartz on the Depression, money growth increased significantly after the 2008 crisis, right? So there was a, again, Austrians don't endorse Friedman's analysis of what happened in the Great Depression but there is sort of a superficial plausibility there to say, yeah, if on the feds watch the quantity of money in the hands of the public collapsed by a third in the early 1930s, you can understand why that might have something to do with prices and wages collapsing and maybe that's not a good thing if you're trying to get out of a depression. You can understand where they're coming from but here it's not, Sumner can't be arguing, oh yeah, people think Bernanke was loose, call him helicopter Ben, but actually, the quantity of money using a certain metric fell significantly that no, actually, according to a lot of standard measures, money growth certainly didn't collapse, right? If you looked at charts, certainly of M1, for those who saw my talk, as M1 was like this and M2 kept growing, it didn't collapse. If you looked at charts of M1 and M2, you would have not have thought, oh yeah, this is when there was an unusually tight monetary policy that got implemented. If anything, you would think it was the same or you would think actually it was much looser because M1 was exploding, right? So that's odd and so for a school of thought that's dubbed monetarism, actually they don't care about money at all. Their whole point is it was very misleading for economists to look at the stock of money following the 2008 crisis, that central banks actually had a really tight policy even though they were dumping in unprecedented amounts of money. So it's just kind of weird that they're called monetarists when they're ignoring money altogether, saying money is a misleading indicator. Also interestingly, so Friedman wasn't alive at that point but Anna Schwartz who again was a co-author with Friedman on the monetary history who helped overturn that conventional Keynesian view of what happened there in the Depression. Interestingly and awkward for Sumner's position, Anna Schwartz was writing in the Wall Street Journal after the financial crisis when the rounds of QE were happening and she was writing saying the Fed has to lose money, this is crazy, they're setting up another boom bus cycle. And so the original monetarist after whom, Sumner is modeling his own work, she was going around saying Bernanke is being too loose, this is crazy, there was a real crisis in housing dumping money in here isn't gonna fix things. So it's funny that Anna Schwartz herself would not go along with Sumner's views on what the Fed was doing in response to the housing crash. Okay, another sort of, it's not a huge deal but when you get into this literature and look at part of the way to motivate this is that you can see Sumner really believes in his model and takes it seriously and let me just give you an example. So when Sumner is explaining what happened after the 2008 crisis and what went wrong, this is a quote from him, he says, as of early 2008, the US economy featured many wage and debt contracts negotiated under the expectation that NGDP would keep growing at about 5% per year. Okay, so again, just think of those words. Sumner is saying, oh yeah, people in the private sector when they were signing wage contracts or when they were buying houses with mortgages, 30 year mortgages, they had the expectation that NGDP would keep growing at 5% a year. So if you just stop and say, is that sentence true? Clearly not because nobody knows what NGDP is. I had to go look that up. When he first became famous, I had to go look up and make sure I knew what NGDP was. So clearly the average worker who's taken a job offer isn't saying, oh, this looks compelling because I'm pretty sure NGDP is gonna keep growing to 5% a year as it has done so during my, no, that's nobody's thinking like that. So that, again, it's not a huge deal because they could just say, well, it's an as if but I'm just pointing out that that kind of language litters the market-monitorist literature and Sumner when he's talking about stuff on his blog is he really, like he's so much in his model, he thinks everybody else is and it's like almost eerie sometimes to see that he doesn't get out, like it's hard for him to step out of it and so that's partly why I argue he can't see when he's wrong because he's so much wedded to his model that any data that comes in front of his face, like he interprets it in terms of his model when clearly, like I say, for example, anyone who's being realistic would not say that sentence that he just wrote to say that workers had the expectation that NGDP would keep growing at 5% a year and that's what happened when it wasn't. So another related problem is they will often in a shorthand way talk about we need to maintain the volume of total expenditures and they think that NGDP growth of 5% a year means total spending and these are phrases they'll use like Sumner and George Selgen when they were writing in the Cato Unbound essay series sort of talking about this stuff, hashing it out, they were using phrases like that to be interchangeable with saying NGDP growing at 5% a year, they would say total spending and no, that's not correct and I'm not just quibbling here that NGDP is the total amount of spending on final goods and services, right? And so it excludes, for example, all financial expenditures like when you go and spend $1,000 buying shares of stock that doesn't get counted in terms of NGDP. If you go buy a used house, a house that's not brand new, that doesn't go into NGDP, you go buy a used car that doesn't go into NGDP. When the baker sells his loaves of bread and then goes and buys more flour to replenish his inventory, that doesn't go into NGDP or at least just a little component of it does if that's the way you're counting it, right? So that's a major issue and so in particular, they're excluding a majority of the actual expenditures in the economy and this underscores, like I say, they take their model, it's a very simplistic model and they're taking it too literally and they're leaving out a lot of the complexity and that'll feed into a related criticism I'll get to in a minute or two. Okay, another, so this is probably my most serious concern is that the criterion of NGDP growth, like to say this is the way we assess the stance of monetary policy and that's the language Sumner would use. To see is money tight or loose, he says, don't tell me about interest rates, as Friedman taught us, that's misleading. Don't even tell me about what's going on with the stock of money of like M0, M1, M2 because that also can be misleading. He said, really what I need to know is what is NGDP growth doing and if it's above 5% for the US for this time period, I would say that's too loose. If it's below 5% it's too tight, by definition, period. That's what I'm talking about, is what Sumner would say. So if the Fed is doing all kinds of dumping, all kinds of money in, but NGDP grows only 4% a year, he'd say they're not doing enough. Okay, you gotta do what the situation warrants. To give you a little bit of where he's coming from, he uses, again, he's a very clever guy, he's very persuasive, so I understand why he convinced people, especially when CPI didn't blow up from 2009 to 12, I understand why more and more people thought, maybe this guy's right, because he's very persuasive and clever, so he would use an analogy of like a bus driver, okay? And so you're going up like a windy mountain road and you're turning the steering wheel, and so if the road goes like this, and right now the bus is going like this, and Sumner says, so what is the bus driver, he needs to turn the wheel to the left, right? And he's saying, it would be silly if he turned the wheel a lot to the left, but not enough and they go off the cliff, and then as we're dropping, and I'm, Sumner's saying, you didn't, you know, the problem was that he had inadequate left turning going on our turnage, and then other people are the most like, oh, I mean, they turned the wheel left more than they ever have in the trip up till now, so clearly it's just that the situation changed and it wasn't enough, you know, and so that's his point that how do you define is the bus driver using his tool correctly, he said it depends on what the road is doing, what the situation calls for, it's not just an absolute measure of what's the angle at which you turn the wheel, and so clearly he's gonna say, if the road goes like that, the right thing to do is to really turn that wheel left, and if you don't do it adequately and you go off the cliff, then he's gonna say that was the problem of the guy driving the bus, you had the wrong policy, it was too right of a wheel configuration, given what the situation called for, so likewise he's saying, if in 2008 what was called for was for the Fed to dump in $12 trillion of new money, and they only dumped in 9 trillion, well then that's too tight, that's what I mean, okay, so that's where he's coming from, okay, so now having said all that, I'm saying the problem with that is it's almost vacuous and non-falsifiable because when an economy, think about it, when an economy goes into a recession, all right, so right away real GDP is falling unless the Biden administration's involved and then they can argue, well not necessarily, because if it happens on our watch, then real GDP falling doesn't mean it's a recession, but in general, a recession means falling real output, so real GDP is clearly falling, and then again in general, people panic especially if there's a financial crisis, the demand to hold money goes up, so other things equal for a given stock of money, you'd expect unit prices to fall also, again other things equal, and so those two things together would make NGP tend to fall, and so if the central bank just kept its policy the normal way, the same that it was before, you would expect NGDP growth to at least decelerate if not actually go negative, all right, and so you can see how there's an inbuilt bias, so what I'm saying is Sumner sort of has a framework that when there's a recession for whatever reason, his measure is gonna say, oh the Fed is doing the thing that's gonna cause the recession, and then you can argue vice versa with the other way, and so my point is that yeah, in practice historically if you look at economies, it's gonna tend to be the case that when they're in recession NGDP growth is gonna be lower than it otherwise would be, but that doesn't prove that it's the low NGDP growth causing that, like the causality actually, you would expect it to run the other way, and only in extreme cases like Zimbabwe and stuff would you see the real economies crashing and NGDP growth is going out just because they have hyperinflation, and Sumner would agree by the way that yes, Zimbabwe had too much money going on at that point. So I use a medical analogy to make sure you get this, so suppose what we're arguing about, doctors have, there's this medical condition, someone's sick in bed, and one group of doctors thinks, oh this liquid right now, this is the thing to cure this condition, okay, and because right now the guy's running a fever, he's got 102 fever, and we're saying, if we inject the patient with this liquid, that'll bring the fever down to 98, the temperature down to 98.6, and then you've got this other group of doctors who say, no, what's in that vial, that's poison, that that's not gonna bring down there, if anything that might make the fever worse, and so we disagree, don't put that in the patient, it's not gonna help the patient. So then they go and they start injecting the patient with more of this liquid that has ever been injected to a patient in the history of medicine, and the fever doesn't go down, it stays the same, would it be helpful? So the second group who said that's poison, they would say, what more do you need to see that this is not helping, you just injected the patient with more of that stuff that has ever been done in history, and it didn't work, and so clearly we're right, right? And then the first group would say, no, what are you talking about? We didn't inject the patient with more of this than has ever been done, and they say, what do you mean? They say, because look at the patient, the way we define how much of this we injected in the patient is if their temperature is optimal or not, and so if the temperature is not that 98.6 or within a point, a tenth of a degree or two, then by definition we injected too little of this liquid, and so since the patient right now is running 102 fever, that means by definition we didn't inject enough of this liquid, so we gotta inject even more. Okay, so do you see how since they're disagreeing about whether that stuff helps or hurts to say the way we're gonna measure the amount that we put into this person, instead of looking at like milliliters, but instead looking at the symptoms, that that would be very dangerous because if they happen to be wrong, then they're just gonna keep doing more and more of that stuff, and it's gonna eventually kill the patient. Okay, so likewise with Sumner, it's if the very thing under dispute, at least with market monitors, vis-a-vis Austrians, is to say the Fed having a looser policy, the Austrians disagree, say though, that's not necessary. You don't need to have loose money in order to fix an ailing economy. In fact, it was a prior round of loose money that set us up for the unsustainable boom bus period, right, and so for Sumner to come along and just say no, by definition, if NGDP's not growing enough, then we need to pump in more money. He's setting himself up to always, his system is always gonna spit out the answer, pump in more money until it works when what if that's part of what's causing the problem, all right, so that's what I mean by this medical analogy. Let me read to you this quote from Sumner, and you'll see what I'm saying partly about this being non-falsifiable. So he wrote this in 2020, all right, so this was right before the pandemic hit. Sumner said, we are entering a golden age of central banking where the Fed will become more effective and come closer to hitting its targets than at any other time in history. Over the next few decades, inflation will stay close to 2%, and the unemployment rate will generally be relatively low and stable. Okay, then he goes, and in fact, Fed policy is becoming more effective because it is edging gradually in a market-monitorous direction. Da-da-da-da, okay, so clearly those specific predictions were wrong, right, it was just a few months later that you saw that go off, and then a year later you saw consumer price inflation way above when he said it's gonna stay close to 2%, but my point is his framework is still salvageable, right? Like he could still say, oh no, they didn't do, or now that price inflation's too high, he could say, well yeah, NGDP growth has run in too much. So if you get what I'm saying, that unless NGDP growth is exactly at 5% a year, Sumner could just say, well, they didn't do what I said. So of course, you know what I mean? So it's tricky that it's sort of like, that's what I mean by non-falsifiable, that no matter what happens, he can say, well, they didn't do what I said because his prescription is kind of only gonna be true when things are all right, all right? So that's another element to see that this actually is a vacuous and almost non-falsifiable criterion. Okay, and then I'm sorry, just repeating something I've already alluded to that in the Austrian framework, again, it's far too simplistic and crude just to say, oh, is there too much money or too little money? Should the Fed step on the gas or step on the brakes? There's this whole capital structure, relative prices, interest rates convey genuine information just like other market prices do. And so in the market monitorist framework, things are extremely simple, just to reduce it to NGDP growth. And another blog post, Sumner just has like an aggregate supply, aggregate demand and just shows, well, see if it were the, what the Austrians say would be one thing and just having two curves move around, they're not even curves, they're just straight lines and using that to diagnose the macro economy to say here's what the central bank should do. That's incredibly crude. If you went to a brain surgeon and said, yeah, I got this tremendous pain here, should I go get a PET scan or something like that? And he just drew true straight lines and said, well, I think we're here on this intersection of these two lines and so that's why we're gonna cut, you would be horrified. You say it's not that I'm saying you're wrong, I'm just saying I think the situation's more complicated than that, right? And yet this is the way we're diagnosing whether the Fed's too loose or too tight in terms of macro policy. Okay, let me stop there. I think we got time for one question. The guy with the bow tie. Yeah, right. So before the question, I wanted to say one quick point. I do think that there was a slight misrepresentation of the market-monitorist view in saying that market-monitorists don't look at the money supply in the sense that it's not, I think the market-monitorist view is to not only look at the money supply and look at it in tandem with money demand, but anyways, I wanted to ask what you think of, given that since 2008 the Fed changed from a corridor to a floor system, how much do you think the importance of the money supply is? I'm not sure if Seljan or Sumner made this analogy, but I think it's fairly fitting that when you're pumping money supply, when you're paying interest on reserves above the federal funds rate, it's kind of like holding down the gas pedal when you're in park, and I think that's fairly fitting. Okay, I'll be real quick because we've got one minute. So the question has to do with the Fed switch to a corridor system, meaning to keep a floor of interest rates by interest on reserves than a higher interest rate, and so they had this band moving around, and the question has to do with if the Fed pumping money in this new context does it matter as much as before? So it might matter in different ways, so it might affect the nature of it, but in general I think it's wrong when people say, oh, how could it not matter if the Fed's injecting tens of billions of dollars buying certain assets, and one way of seeing that is if it doesn't matter, then why does the Fed keep doing it? So certainly the people who are selling those assets and getting the money, they appreciate that policy and they would be very upset if the policy were to be discontinued. So I guess that's one way I would say, so yes, the way the Fed changes, does its rules and does a certain policies, that might have an impact, but to say, does that mean therefore pumping in money, yes or no, has no impact? I would say clearly not, because again, if it didn't matter, then why do they keep buying more assets? Why did the monetary base go like that following Corona? Okay, thanks everybody.