This post isn’t about pointing to specific people and accusing them of intellectual dishonesty. It was actually born out of curiosity about the pop econ comparison of QE to a drug addiction, especially after I posted a resounding rebuke of Kashkari’s similar comments here. I really do want to be fair, and I have a sinking feeling that I allowed my passions to get the better of me in that post. I unfairly criticized Kashkari for being socially irresponsible, implying willfulness, when really it should have been more for being a parrot. Though, my new revelation changes nothing about the rest of the content and I am sticking to it.
My research into the question regarding QE’s addictive properties started quite by accident when I did a search on Milton Friedman and real interest rate. I stopped wading through the results when I came to the infamous “inflation is always and everywhere a monetary phenomenon” video, with also a similar one on stimulus and inflation where Friedman compares printing money to alcoholism. Both of these videos leave me fighting back tears, not because the economics were bad, but because of the choice of framing and rhetoric appears to have had lasting consequences.
Putting the sum ideas into perspective, these were not videos made for the ages, but as an address to a specific problem in a specific political-economic context. They imply that Friedman believed that the central bank was printing too much money based on the supply side circumstances, a point I have countered from time to time on my blog as one of the reasons inflation targeting is a bad idea. The politicians need to take supply shocks in the pants rather than dump those problems onto the central bank. Doing so victimizes the citizenry twice over, once from the supply shock and again from the demand shock.
In the “inflation is always and everywhere a monetary phenomenon” Friedman uses the following graph to make his point:
I do not know where Friedman got data for his graph, but I am assuming it is accurate. I am also assuming that this graph indeed proves his point. So, even if I assume the validity of the data and argument, looking at a graph that I created with available data from 2000-2010 (my source is FRED), I would not be able to make the same argument about the new time series because the relationship between the quantity of money to output and CPI has collapsed. I would have to rethink the applicability of such an argument before repeating it 40 or so years later.
I started with M1, and then I added M2.
I stopped there because I am reasonably sure that no matter how far I reach into the bowels of money quantity measurements, the results are not likely to change, and at some point would become more or less cherry-picking data. It just should not be that hard to prove if there were something to prove, but my results thus far show there is nothing to be proven.
As for what this says about QE’s addictive properties is that even though Friedman’s specific argument of the day has become invalid, those suggesting that QE under necessary circumstances is nothing but feeding an addiction are still whipping the rhetorical dead horse with a long since irrelevant argument. If they can’t back it up with modern data, it should be withdrawn.
My hope going forward is that during our discourse, market monetarists do it for the ages as to avoid burdening posterity with stale arguments and stale rhetoric.
[Update] I’ve updated my graph to reflect CPI 2000=100, a data set I had to dig around on FRED for, as it is far more relevant than the 1984 scale. I’ve also simplified it by removing M2/output. It has some surprising results, showing an inverse relationship to Friedman’s graph, and that the old rhetorical horse is still very much dead.
So, to all the non-thinkers out there, go ahead, whip that dead, alcoholic and morphine-addicted horse some more and make my day!