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This article seems to miss both the actual point Friedman made and what modern economists and central bankers actually believe. Modern economists talking about

This article seems to miss both the actual point Friedman made and what modern economists and central bankers actually believe. Modern economists talking about "interest rates" are talking about the base interest rate which is the cost of bank borrowing which creates new money. Friedman was also interested in regulating the supply of new money but wanted to try to fix the quantity of a monetary aggregate, which could be achieved by.... tweaking base interest rates. The modern central banking approach is to fix the base interest rate (essentially the price of creating money) for a fixed period and be more cautious about adjusting it rather than try to directly fix the quantity of money. Central bankers tried Friedman's approach of fixing the quantity of [a particular aggregate of] money in the early 1980s, it was extremely unstable with wild interest rate lurches needed to fix the quantity of the monetary base (and the monetary aggregates the bank wasn't targeting still wildly fluctuated in volume) and even Friedman conceded that with hindsight he might have made different recommendations. So they switched to fixing the price of credit rather than the quantity instead The modern policy is consistent with what both Friedman and central bankers wanted to achieve (a relatively low and predictable rate of inflation). They raise base rates because the economy is growing and the level of borrowing with it. But they're not interested in raising interest rates so rapidly that firms end up with the same low level of borrowing as before, merely in stopping credit expansions from growing too fast and creating price inflation (and conversely, making it cheaper and easier to borrow when lending drops) so the interest rate rises tend to track rather than halt the natural rise in lending.

boppo1 5y ago
>the economy is growing Is it really though? It seems like we have less and work more. Could some of our measurements be wrong?
- biorach 5y ago
  It's quite possible to simultaneously have a growing economy and increasing inequality.
  - roenxi 5y ago
    It is possible. But the evidence that is happening is relatively weak. The wealthy would struggle to consume anything more than they already do. A lot of commodity indexes suggest growth in the US has actually been stalled for a while (eg, energy, copper use are two metrics that don't look rosy to me). Believing that economies like the US are growing often requires accepting beliefs like the economy being disassociated from the physical world. On the one hand, that is a defensible position. On the other it is stretching - some people care more about the physical world.
    - andi999 5y ago
      But something is happening, the SP500 is increasing (which in USD would be a meaningless statement), but it is also increasing in all (didnt checkk all) other currencies in the world, isnt it?
      - Jensson 5y ago
        Because USD is a bubble, other countries wants to keep the USD high since they have lots of USD reserves, meaning that when USA prints money it doesn't weaken the USD. Until the other countries decides to bite the bullet and people stop using the USD as a global reserve currency.
        iso1210 5y ago
        So why is gold about the same price as it was in 2011?
        boringg 5y ago
        USD a bubble is a huge stretch - you discount all your other comments with a comment as far reaching as this. If you are trying to insinuate that the USD has a higher value than its intrinsic value due to required demand as a result of a being a reserve currency than maybe you have something. That is nothing to do with being a bubble. The USD is a reserve currency which has many profound effects associated with that it is not a "bubble" asset class at this point. When the USD expands its currency base it actually does reduce the the USD valuation relative to other countries.
- pas 5y ago
  What do you mean "we"? Also it's quite possible that what you have is getting more and more expensive. (Eg. land! Because more people want the desirable plots/lots.) Energy. You use roughly the same amount, but it's getting more expensive, so you end up with less money to spend on leisure. Similarly with education and healthcare. People use the same amount (by default), but it's getting more expensive. This is sometimes called the cost disease. Of course for services the cause is mostly the Baumol effect, but for land, housing, and energy it's mostly because supply is constrained. http://rationallyspeakingpodcast.org/236-why-are-the-prices-so-dmn-high-alex-tabarrok-2/ http://rationallyspeakingpodcast.org/236-why-are-the-prices-... and https://slatestarcodex.com/2019/06/10/book-review-the-prices-are-too-dmn-high/ https://slatestarcodex.com/2019/06/10/book-review-the-prices... and https://randomcriticalanalysis.com/why-conventional-wisdom-on-health-care-is-wrong-a-primer/ https://randomcriticalanalysis.com/why-conventional-wisdom-o... also very interesting and important aspect https://www.phenomenalworld.org/analysis/the-class-politics-of-the-dollar-system/ https://www.phenomenalworld.org/analysis/the-class-politics-... !
- mcv 5y ago
  Ah, but that's because "the economy" is not about you, but about rich people's ability to own everything. That is certainly growing.
- imtringued 5y ago
  Ever heard of Thomas Piketty? r>g? Land and money both have an unnaturally high liquidity preference i.e. they have value because of network effects. This allows returns of the rich to exceed the growth rate and thereby cause the rest of society to end up poorer. Ultimately, the returns on capital are paid by the working class and paid to the rentier class, that owns exclusive access to publicly created value (the rich obviously have more money and land than the poor).
runeks 5y ago
> Modern economists talking about "interest rates" are talking about the base interest rate which is the cost of bank borrowing which creates new money. I find it interesting how fundamentally this "base interest rate" has changed after transitioning away from a gold standard. During the gold standard, this interest rate was simply the short term interest rate (also called the "discount rate") and did not involve the creation of new money (gold). So, during the gold standard, it was paid out of the existing supply of money (gold), whereas now it's created out of thin air.
- CraigJPerry 5y ago
  Can you clarify what you mean? The discount rate was heavily manipulated during the gold standard. This is covered in depth in “Monetary Policy Under the Gold Standard, 1880 to 1914” by Bloomfield - there’s an online copy here https://fraser.stlouisfed.org/title/monetary-policy-international-gold-standard-1880-1914-6025/fulltext https://fraser.stlouisfed.org/title/monetary-policy-internat... >> did not involve the creation of new money (gold) New money was created all the time - it was supposed to be backed by an amount of gold reserve. That was the whole point. It is not disputed that this is not what happened at all times.
- imtringued 5y ago
  That works until your economy stops growing, then the interest rate will not fall below liquidity preference, even though the return on capital is going down, e.g. everyone floods out of stocks into a useless shiny piece of metal. In a market with perfect competition, profits are 0%, making it impossible to pay any amount of interest. I hope people notice the absurdity of valuing a company that produces more food less than a shiny metal that lets you speculate that you can buy food with it, even beyond the point where the food manufacturer had to shut down because you didn't pay him.
HPsquared 5y ago
Most money is created by commercial bank lending. When a loan is made, the bank simultaneously credits the borrower's account and a adds a corresponding "negative" balance on the loan. Money and debt are created and destroyed together, much like matter and antimatter. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
- marcosdumay 5y ago
  Yeah, it's not that simple. It's never that simple. When you deregulate the banks enough so that the 80's mechanism the GP talked about isn't working anymore, dealing with oscillations on the deposit rate becomes a major bottleneck for banks to issue new money. I don't know enough to claim it's the largest bottleneck, but governments everywhere act like if it is. ("Governments everywhere" have mixed results on getting economics right, so take what you want from that.) But whatever the relative size, it's a relevant one.
onlyrealcuzzo 5y ago
Is the volume of personal credit not absolutely exploding right now because of the real estate boom? Maybe I misread the entire paper - but it seemed that the premise was low interest rates are correlated with or cause low volume of credit. My understanding is that government, personal, and business debt have all grown at one of the fastest paces in history. Am I just completely wrong? Did I misread this post entirely?
- iso1210 5y ago
  US household debt as percentage of GDP looks down https://www.statista.com/statistics/248283/household-debt-ratio-to-gdp-in-the-united-states/ https://www.statista.com/statistics/248283/household-debt-ra...
  - onlyrealcuzzo 5y ago
    According to your source, it's above where it was pre-pandemic. And mid-pandemic, when interest rates were arguably the lowest, is when it peaked at 85%. FRED is a better source: https://fred.stlouisfed.org/series/HDTGPDUSQ163N https://fred.stlouisfed.org/series/HDTGPDUSQ163N It even has a chart [= I guess to the author's point - HH debt to GDP was much higher before 2008 when interest rates were much higher. However, lowering interest rates recently coincided with a DRAMATIC increase HH debt (the largest jump on the chart by far).
    - iso1210 5y ago
      The pandemic isn't over, yet the direction of debt is downwards. If you take the rate of change, I guess it slowed its descent about 2015, which happens to be when rates were increased from 0.25%. Seems that increasing rates causes the rate-of-change of debt to increase But that's by the point. Your claim was > Is the volume of personal credit not absolutely exploding right now because of the real estate boom? Well not according to the graphs you provided. Q2 2021 debt was 77.7%, down 0.9pp on Q1 2021.
- mym1990 5y ago
  A record number of home buyers are paying cash as well, 25% at peak last year. There is also a lot of fintech buying that was going on.

boppo1 5y ago

>the economy is growing Is it really though? It seems like we have less and work more. Could some of our measurements be wrong?

biorach 5y ago
It's quite possible to simultaneously have a growing economy and increasing inequality.
- roenxi 5y ago
  It is possible. But the evidence that is happening is relatively weak. The wealthy would struggle to consume anything more than they already do. A lot of commodity indexes suggest growth in the US has actually been stalled for a while (eg, energy, copper use are two metrics that don't look rosy to me). Believing that economies like the US are growing often requires accepting beliefs like the economy being disassociated from the physical world. On the one hand, that is a defensible position. On the other it is stretching - some people care more about the physical world.
  - andi999 5y ago
    But something is happening, the SP500 is increasing (which in USD would be a meaningless statement), but it is also increasing in all (didnt checkk all) other currencies in the world, isnt it?
    - Jensson 5y ago
      Because USD is a bubble, other countries wants to keep the USD high since they have lots of USD reserves, meaning that when USA prints money it doesn't weaken the USD. Until the other countries decides to bite the bullet and people stop using the USD as a global reserve currency.
      - iso1210 5y ago
        So why is gold about the same price as it was in 2011?
      - boringg 5y ago
        USD a bubble is a huge stretch - you discount all your other comments with a comment as far reaching as this. If you are trying to insinuate that the USD has a higher value than its intrinsic value due to required demand as a result of a being a reserve currency than maybe you have something. That is nothing to do with being a bubble. The USD is a reserve currency which has many profound effects associated with that it is not a "bubble" asset class at this point. When the USD expands its currency base it actually does reduce the the USD valuation relative to other countries.
pas 5y ago
What do you mean "we"? Also it's quite possible that what you have is getting more and more expensive. (Eg. land! Because more people want the desirable plots/lots.) Energy. You use roughly the same amount, but it's getting more expensive, so you end up with less money to spend on leisure. Similarly with education and healthcare. People use the same amount (by default), but it's getting more expensive. This is sometimes called the cost disease. Of course for services the cause is mostly the Baumol effect, but for land, housing, and energy it's mostly because supply is constrained. http://rationallyspeakingpodcast.org/236-why-are-the-prices-so-dmn-high-alex-tabarrok-2/ http://rationallyspeakingpodcast.org/236-why-are-the-prices-... and https://slatestarcodex.com/2019/06/10/book-review-the-prices-are-too-dmn-high/ https://slatestarcodex.com/2019/06/10/book-review-the-prices... and https://randomcriticalanalysis.com/why-conventional-wisdom-on-health-care-is-wrong-a-primer/ https://randomcriticalanalysis.com/why-conventional-wisdom-o... also very interesting and important aspect https://www.phenomenalworld.org/analysis/the-class-politics-of-the-dollar-system/ https://www.phenomenalworld.org/analysis/the-class-politics-... !
mcv 5y ago
Ah, but that's because "the economy" is not about you, but about rich people's ability to own everything. That is certainly growing.
imtringued 5y ago
Ever heard of Thomas Piketty? r>g? Land and money both have an unnaturally high liquidity preference i.e. they have value because of network effects. This allows returns of the rich to exceed the growth rate and thereby cause the rest of society to end up poorer. Ultimately, the returns on capital are paid by the working class and paid to the rentier class, that owns exclusive access to publicly created value (the rich obviously have more money and land than the poor).

runeks 5y ago

> Modern economists talking about "interest rates" are talking about the base interest rate which is the cost of bank borrowing which creates new money. I find it interesting how fundamentally this "base interest rate" has changed after transitioning away from a gold standard. During the gold standard, this interest rate was simply the short term interest rate (also called the "discount rate") and did not involve the creation of new money (gold). So, during the gold standard, it was paid out of the existing supply of money (gold), whereas now it's created out of thin air.

CraigJPerry 5y ago
Can you clarify what you mean? The discount rate was heavily manipulated during the gold standard. This is covered in depth in “Monetary Policy Under the Gold Standard, 1880 to 1914” by Bloomfield - there’s an online copy here https://fraser.stlouisfed.org/title/monetary-policy-international-gold-standard-1880-1914-6025/fulltext https://fraser.stlouisfed.org/title/monetary-policy-internat... >> did not involve the creation of new money (gold) New money was created all the time - it was supposed to be backed by an amount of gold reserve. That was the whole point. It is not disputed that this is not what happened at all times.
imtringued 5y ago
That works until your economy stops growing, then the interest rate will not fall below liquidity preference, even though the return on capital is going down, e.g. everyone floods out of stocks into a useless shiny piece of metal. In a market with perfect competition, profits are 0%, making it impossible to pay any amount of interest. I hope people notice the absurdity of valuing a company that produces more food less than a shiny metal that lets you speculate that you can buy food with it, even beyond the point where the food manufacturer had to shut down because you didn't pay him.

HPsquared 5y ago

Most money is created by commercial bank lending. When a loan is made, the bank simultaneously credits the borrower's account and a adds a corresponding "negative" balance on the loan. Money and debt are created and destroyed together, much like matter and antimatter. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

marcosdumay 5y ago
Yeah, it's not that simple. It's never that simple. When you deregulate the banks enough so that the 80's mechanism the GP talked about isn't working anymore, dealing with oscillations on the deposit rate becomes a major bottleneck for banks to issue new money. I don't know enough to claim it's the largest bottleneck, but governments everywhere act like if it is. ("Governments everywhere" have mixed results on getting economics right, so take what you want from that.) But whatever the relative size, it's a relevant one.

onlyrealcuzzo 5y ago

Is the volume of personal credit not absolutely exploding right now because of the real estate boom? Maybe I misread the entire paper - but it seemed that the premise was low interest rates are correlated with or cause low volume of credit. My understanding is that government, personal, and business debt have all grown at one of the fastest paces in history. Am I just completely wrong? Did I misread this post entirely?

iso1210 5y ago
US household debt as percentage of GDP looks down https://www.statista.com/statistics/248283/household-debt-ratio-to-gdp-in-the-united-states/ https://www.statista.com/statistics/248283/household-debt-ra...
- onlyrealcuzzo 5y ago
  According to your source, it's above where it was pre-pandemic. And mid-pandemic, when interest rates were arguably the lowest, is when it peaked at 85%. FRED is a better source: https://fred.stlouisfed.org/series/HDTGPDUSQ163N https://fred.stlouisfed.org/series/HDTGPDUSQ163N It even has a chart [= I guess to the author's point - HH debt to GDP was much higher before 2008 when interest rates were much higher. However, lowering interest rates recently coincided with a DRAMATIC increase HH debt (the largest jump on the chart by far).
  - iso1210 5y ago
    The pandemic isn't over, yet the direction of debt is downwards. If you take the rate of change, I guess it slowed its descent about 2015, which happens to be when rates were increased from 0.25%. Seems that increasing rates causes the rate-of-change of debt to increase But that's by the point. Your claim was > Is the volume of personal credit not absolutely exploding right now because of the real estate boom? Well not according to the graphs you provided. Q2 2021 debt was 77.7%, down 0.9pp on Q1 2021.
mym1990 5y ago
A record number of home buyers are paying cash as well, 25% at peak last year. There is also a lot of fintech buying that was going on.