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The dead horse I’m beating is very much alive

Summary:
Lots of people tell me I’m beating a dead horse. The profession knows that low interest rates don’t equate to easy money. You can find dozens of quotes from eminent economists attesting to this fact: “Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.  .  .  . After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.”(Milton Friedman, 1997) “It is dangerous always to associate the easing or the tightening of monetary policy

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Lots of people tell me I’m beating a dead horse. The profession knows that low interest rates don’t equate to easy money. You can find dozens of quotes from eminent economists attesting to this fact:

“Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.  .  . After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.”(Milton Friedman, 1997)

 “It is dangerous always to associate the easing or the tightening of monetary policy with a fall or a rise in short-term nominal interest rates.”  (Frederic Mishkin, 2007, p. 606)

The argument that current monetary policy in Japan is in fact quite accommodative rests largely on the observation that interest rates are at a very low level. I do hope that readers who have gotten this far will be sufficiently familiar with monetary history not to take seriously any such claim based on the level of the nominal interest rate. One need only recall that nominal interest rates remained close to zero in many countries throughout the Great Depression, a period of massive monetary contraction and deflationary pressure. In short, low nominal interest rates may just as well be a sign of expected deflation and monetary tightness as of monetary ease. (Ben Bernanke, 1999)

But then why do we continue to see prestigious outlets such as the Financial Times saying the following:

Unlike many on America’s left, I’ve always been sceptical that ultra-low interest rates make things easier for the poor. Keeping rates too low for too long encourages speculation and debt bubbles. When they burst, they always hurt those on low incomes the most, as we witnessed during the 2008 financial crisis.

And yet for years, progressives have argued that loose monetary policy and low interest rates are necessary to promote employment, particularly at the lower end of the socio-economic ladder.

The second paragraph is a complete non-sequitur with the first. We don’t have low rates due to a “loose” monetary policy. Interest rates tell us nothing useful about the stance of monetary policy.

Can someone explain to me why people keep saying things like this if the correct view is all so “well known”? Why does this keep happening? And how can it be stopped?

The beatings will continue until the horse is completely dead.


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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