Friday, October 1, 2010

We Are All Quasi-Monetarists

Paul Krugman weighs in on the debate stirred up by my post on the excess demand for money:
Brad DeLong manfully takes on the efforts of various commentators to define away the paradox of thrift and redefine our current problems as somehow wholly monetary. As I see it, this is all a desperate attempt to cut and stretch things into a quasi-monetarist framework, for no good reason. 
So those of us who believe that all along the Fed could have done more, should have done more, and still should be doing more are now "quasi-monetarists." Fine, but addressing the above list of  Fed shortcomings was the  ultimate point of  my post.   Yes, I did this by pointing out that the current aggregate demand problem is at its core an excess money demand problem.  And, thus, policymakers who wish to address the AD problem must ultimately address an excess money demand problem.  Here, I was just attempting to take a deeper look at the AD problem from a monetary perspective.  DeLong really didn't disagree with my assessment, he just questioned how the Fed could address the excess money demand problem in practice.   The fact is we really aren't all that different on this issue.  Even Krugman at some level is a quasi-monetarist--he has to be given we live in monetary economy.  This point is forcefully made by both Nick Rowe and Scott Sumner in their replies to Krugman.

Update: Josh Hendrickson adds further perspective on this debate.


  1. I am sceptical that the paradox of thrift is a practical issue in the US (or UK) today. Since the Fed sets the Fed funds rate, it will supply as much base money as is required at a fixed price. In the first instance, the Fed will trade not t-bills for base money but repo debt, and not necessarily taking government debt as collateral - in other words, not such a close substitute for the medium of exchange. And I doubt whether it matters much that this base money is scheduled to be withdrawn when the loan matures, because the loan can be renewed on demand, probably at the same terms or better if the economy does not pick up in the meantime. Moreover, if it looks like the demand for money will remain high indefinitely, the Fed will probably subsitute the repo debt for some much longer lived asset so that the base money is effectively guaranteed to exist as long as it is required. Yes, the Fed can try to withdraw this base money by selling their long-lived asset before it matures, but they may have to accept a prohibitively low price if the holders of base money are keen to hold on to it.

    But I don't suppose lack of practical evidence for the existence of the paradox of thrift will deter Paul Krugman or Martin Wolf from raising it to justify more easing.

  2. DeLong says we have the safe asset shortage, not the shortage of money.
    After Lehman, the relative price of very safe but less liquid assets (such as TIPS) has crashed, so it is a strong evidence that the cause of the crisis is monetary disequilibrium. More here:

  3. You're going to get your wish come November 4th Brad; another trillion has already been baked into the cake; the downward trend in the USD the last few weeks is directly related to what's going to come 11/4. But be careful for what you wish; currency games can be dangerous things. Remember the term "beggar thy neighbor" when you next write urging the debasement of currency.

  4. Excellent posts of late. Keep up the good work.

    Please call yourself a "monetary bull."