Austrians get terribly confused (but so does the Fed)

According to Austrian David Howden:

This is an historic time. After six years of the most novel and expansive monetary policies since its creation 100 years ago, the Fed is finally ready to admit its role in prolonging the current recession… kind of.

Two economists at the Federal Reserve branch in St. Louis recently wrote a commentary blaming the sluggish recovery on consumers more interested in “hoarding” cash then spending. Not much of a surprise there, but the two reasons cited as to why consumers have a change of heart are telling.

  1. Increased uncertainty because of the crisis has caused an increase in money holdings.
  2. The low interest rate policy of the Fed has removed much of the incentive to invest that consumers used to be faced with.

So, first the low interest rate policy is the most expansive monetary policy in history. But then, the low interest rate policy is an extremely tight monetary policy!

There are those who look only at the supply of money and there are those, like Howden, who look only at demand.

Good monetary policy is good if it satisfies the demand for money, especially when the demand for money has gone up (velocity down) due to uncertainty or whatever. If it did, people wouldn´t be worried about hoarding (not spending).

Yes, the Fed is guilty, but not because people hoard due to low interest rates (which, given the view that monetary policy is conventionally thought to be interest rate policy, it is seen as highly expansionary, or ‘accommodative’) but because the Fed ‘refuses’ to satisfy the enlarged demand.

2 thoughts on “Austrians get terribly confused (but so does the Fed)

  1. From the linked commentary: “In this regard, the unconventional monetary policy has reinforced the recession by stimulating the private sector’s money demand through pursuing an excessively low interest rate policy (i.e., the zero-interest rate policy).”

    Oh God!

  2. Egads.

    And..if ever we get to a modern economy with long-term zero-inflation…just what do the Austrians think interest rates will be?

    We saw in Japan ZLB at zero inflation…we are seeing in Europe the same thing…

    But that is okay! As the important thing is that a nominal index of prices, which may be a dubious accuracy in the long-term, is at 100 at all times.

    Because zero inflation is the real goal of right-wing/Austrian economists—why, I do not know. The costs associated with mild inflation (the misallocation of resources) are so small as to be worth ignoring…

    the costs associated with zero inflation are huge reductions in real output…

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