Noah Smith has a good post up on what he calls the “Finance Macro Canon”. This refers to the many vague assertions that tend to accompany discussions on QE. I’ve spent a lot of time talking about all of these and I think Noah and I are basically on the same page on this stuff (“#4, 5, 6, and 7 very well might be true, #3 is goofy, #2 is utterly wrong, and #1 is one of the biggest mysteries of macroeconomics”).
Noah then goes on to blame some of this thinking on the work of Milton Friedman, or rather, the interpretation of Friedman. And I think he’s right again. But it’s not necessarily Friedman’s fault as Scott Sumner notes. And in my opinion, this is largely due to a misinterpretation of what I think is an abused and extremely vague Friedman quote:
“Inflation is always and everywhere a monetary phenomenon”
You’ve almost certainly seen this or heard this quote. And if you hate the government and think the government “prints money” then this is an easy one to throw in people’s faces. But this term can mean lots of different things. After all, a “monetary phenomenon” can be interpreted in any number of different ways. But to the layperson, the term is very simple – it means that if the government increases the money supply then inflation goes up. It’s that simple. So, connect the dots – describe QE as “money printing” and that means inflation is coming. Obviously, to an economist or someone who understands how QE works, that’s far too simple. And to someone like Scott Sumner, it makes his head explode because the interpretation of Friedman is much more complex in the Market Monetarist world than many imply.
So yeah, I think we can exonerate Friedman to some degree. That doesn’t mean I agree with everything Friedman said, but I do think that a lot of the Finance Macro Canon misunderstandings probably come from misunderstanding a basic Friedman concept – after all, Friedman’s beloved equation (MV=PQ) had more than one component so it would defy logic to think that he believed that only one component actually mattered….*
* NB – I find this equation utterly useless given that the term “money” is not even properly defined, but that’s a topic for another day.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.