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Liveblogging World War II: June 16, 1941

Should We Do Another Round of Quantitative Easing? Debate with Jim Grant

What I prepared:

I am here to bring you the word that Milton Friedman would bring if he were still with us.

We have seen something like this--but worse--twice before: the Great Depression, and Japan's lost decades. A collapse in trust in the solvency of financial institutions induces the hoarding cash as part of the safe-asset tranche of portfolios. The economy's cash disappears from the transactions money stock--and so, for standard monetarist reasons, spending declines and unemployment rises. It's not a conventional monetarist recession in which the money supply shrinks, for the money is still there--just not available for transactions.

In such a situation, standard open-market purchases don't help the economy: the increased money stock goes straight into the hoarded safe-asset tranche. What you need to do is one of two things: fiscal policy--have the government create additional Treasuries for the safe-asset tranche and thus trigger the release of the economy's cash back into the transactions balances; monetary policy via quantitative easing. Expansionary monetary policy even at the zero lower bound via quantitative easing is what Milton Friedman recommended for the Great Depression and for Japan.

That's what Friedman would be recommending were he with us today--keep doing rounds of quantitative easing until we get the economy's transactions cash balances and the flow of spending back to normal levels.

If you want to oppose quantitative easing you need to denounce Milton Friedman as a dangerous lefty.

The video at


I must say I found spending six minutes with Jim Grant rather depressing...

I found it depressing because the major unfairness Grant focused on is that, because of the Federal Reserve, investors in money market funds can get only one basis point of interest. The 9% unemployed: they are not the victims. Those who cannot sell their houses because of the foreclosure overhang: they are not the victims. Those whose businesses crash because of slack aggregate demand call they are not the victims. The real victims are the rentiers who have a right to a nice solid well above inflation safe return, and from whom the Federal Reserve is stealing that right.

I found it depressing that when Jim Grant searches for an analogy to quantitative easing, the analogy he comes up with is the creation of the special drawing right in 1968. In 1968 employment in the North Atlantic was full. Today it is not. In 1968 growth in the North Atlantic was rapid. Today it is not. In 1968 expectations of inflation had lost their anchor. Today inflation expectations are better anchored than I have seen them in my lifetime. You would have to search long and hard to find an analogy to quantitative easing worse than the creation of the special drawing right in 1968. depressingI found it remarkable that Jim Grant is hostile to all forms of macroeconomic policy: they manipulate things. They manipulate demand. They manipulate prices. They manipulate interest rates. And all of these manipulations are bad. But why are they bad? In a world of moral hazard, over everage, fads, bubbles, herding , extrapolate of expectations, and sudden shifts in confidence and risk tolerance there is plenty of room for government with deep pockets and some informational advantages to stabilize the economy and push market price is closer to their fundamental values. The government can be the ultimate stabilizing speculator. And it should be applauded when it plays this role. But Jim Grant doesn't admit this possibility. For Jim Grant: the market giveth, the market taketh away, blessed be the name of the market and cursed be thou that interfereth with it.

And I found what I could gauge of Jim Grant's worldview depressing as well. He seemed to be selling rentier-populist ressentiment. Grant's world is full of "takers"--and the Federal Reserve is helping them. And the biggest takers in Jim Grant's mind are the hedge fund operators of Greenwich, Connecticut. Why are they the biggest takers? Because they can borrow cheap, at low interest rates, and put the money they borrow to work making fortunes. If only the Federal Reserve would shrink the money stock and raise interest rates! Then the hedge funds would have to pay healthy interest rates for their cash! Then the profits would flow to the truly worthy: the rentier coupon-clippers now suffering with their one basis point yields.

Never mind what a policy of monetary restraint to "normalize" interest rates would do to the unemployed--and the employed--to the underwater homeowners--and the above-water homeowners--and to the bankrupt businessmen--and to the businessmen not yet bankrupt.

Other things I had prepared, but did not say:

A depressed economy with a slack labor market, low wages, and very low interest rates can be consistent with high asset values and ample corporate profits. But policies that produce such an outcome aren't policies for economic recovery. They are policies for class war. They are not in the public interest...

A too-strong dollar is not in the public interest: a too-strong dollar greatly increases the future chances of a major, major dollar crash that will produce a depression that makes today look like a day on the beach at Malibu. When the dollar is at a level where U.S. net foreign debt is growing unsustainably fast it is time to think about lowering it, not keeping it where it is or raising it...

There were economists who thought that you really needed to eat the high unemployment of a recession and not do anything to try to boost the economy. Ludwig von Mises, for example. And von Mises used to denounce Milton Friedman at Mont Pelerin Society meetings as a socialist. But von Mises is really not the company you want to be in...