One good paragraph and two awful ones!

In his conclusion to “The Idolatry of Interest Rates Part I: Chasing Will-o’-the-Wisp”, James Montier writes:

This paper has sought to tackle two forms of idolatry surrounding interest rates. First is the idolatry of the “equilibrium/natural/neutral” rate of interest displayed by central bankers around the world. This is a make-believe concept with no foundation in the way our financial world really works. It is scary to think that this is the topic that central bankers are debating. Talk about a massive exercise in navel gazing!

The second idolatry I’ve sought to tackle is the modern-day belief in the world’s greatest con: that monetary policy matters. There is precious little evidence that monetary policy matters for the major components of demand (investment and consumption look pretty immune to the shifts in interest rates over time).

Perhaps it is time to recall that we have another tool in our economic kit: fiscal policy. This is a political pariah of a policy, but offers a potential way out of the low growth we find ourselves facing.

The first paragraph is perfect. “Talk about a massive exercise in navel gazing”, indeed!

(Update) Picture of “navel gazing”:

Navel Gazing

But Montier loses it badly thereafter. If he only went and asked FDR, or Paul Volcker, or Kuroda, to name only a few “operatives”. In 1933, despite the large depreciation of the dollar, the trade balance went into deficit, the same happening when Kuroda got a huge yen depreciation in 2013. Volcker whacked inflation with? You guessed, monetary policy.

He´s right that “there´s precious little evidence that monetary policy matters for the components of demand. That´s the implication of the “never reason from a GDP component change” principle! What matters is AD (NGDP).

And fiscal policy, without an adequate monetary policy, certainly does not offer a way out!

One thought on “One good paragraph and two awful ones!

  1. Yes, Japan tried plenty of fiscal stimulus—but as long as the old Bank of Japan kept its foot on the monetary windpipe, the Japan economy suffocated.

    Yes, forget interest rates—but go big on QE. I think QE married to tax cuts is another great idea.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s