The Corner

Economy & Business

Money Is Getting Looser

The association of low interest rates with loose money and high interest rates with tight money is an understandable fallacy, but as Milton Friedman pointed out it is a fallacy. The low interest rates of 1930s America and 1990s Japan were, as he said, symptoms of very tight money. His argument implies, further, that falling interest rates can coincide with and even be caused by a tightening of monetary policy.

Because of that widespread fallacy, the conventional wisdom made a major error about the economic crisis that hit in 2008 and another one about the recovery that followed. Because the Federal Reserve did not raise interest rates during 2008, the CW failed to recognize that monetary policy had disastrously tightened during that year. And because interest rates were very low (and the Fed’s balance sheet swollen) thereafter, the CW mistakenly saw monetary policy during the early years of the recovery as extremely loose. (I went into all of this in a recent article for NR that went back over the monetary history of the last ten years.)

Now we’re seeing the exact opposite mistake being made: Monetary policy is getting looser but a lot of people think it’s getting tighter because interest rates are rising. (President Trump thinks they’re rising too fast.) Scott Sumner makes the case that money is getting looser here: Whether you gauge looseness by looking at inflation, inflation and unemployment, or nominal spending, monetary policy has been turning more expansionary.

Sumner thinks monetary policy is close to neutral (as it should be) right now, and is agnostic about whether it is a little too expansionary or a little too contractionary. But I’d add that the direction in which the Fed is going is a symptom of what’s wrong with its approach to monetary policy. Monetary policy shouldn’t get looser as an economy strengthens. It should make the business cycle milder, not more extreme. But it has been doing the latter, and confusion about interest rates helps explain why.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

Most Popular


Men Literally Died for That Flag, You Idiots

The American flag’s place in our culture is beginning to look less unassailable. The symbol itself is under attack, as we’ve seen with Nike dumping a shoe design featuring an early American flag, Megan Rapinoe defending her national-anthem protests (she says she will never sing the song again), and ... Read More

The Plot against Kavanaugh

Justice on Trial, by Mollie Hemingway and Carrie Severino (Regnery,  256 pp., $28.99) The nomination and confirmation of Brett Kavanaugh to the Supreme Court was the political event of 2018, though not for the reasons anyone expected. All High Court confirmations these days are fraught with emotion and tumult ... Read More
Politics & Policy

He Just Can’t Help Himself

By Saturday, the long-simmering fight between Nancy Pelosi and her allies on one side and the “squad” associated with Alexandria Ocasio-Cortez on the other had risen to an angrier and more destructive level at the Netroots Nation conference. Representative Ayanna Pressley, an African-American Massachusetts ... Read More
Politics & Policy

Ilhan Omar Is Completely Assimilated

Beto O’Rourke, the losing Texas Senate candidate who bootstrapped his way into becoming a losing presidential candidate, had a message for refugees who had come to America: Your new country is a hellhole. The former congressman told a roundtable of refugees and immigrants in Nashville, Tenn., last week: ... Read More
White House

On Gratitude and Immigration

Like both Rich and David, I consider it flatly inappropriate for the president of the United States to be telling Americans -- rhetorically or otherwise -- to “go back where you came from.” In consequence, you will find no defense of the president from me, either. What Trump tweeted over the weekend was ... Read More

We All Wanted to Love the Women’s Soccer Team

For the first time in my life, I did not root for an American team. Whatever the sport, I have always rooted American. And if those who called in to my radio show were representative of my audience, many millions of Americans made the same sad choice. It takes a lot for people like me not to root for an ... Read More

The ‘Squad’ Gives a Gift to Donald Trump

On Sunday, Donald Trump gave the Democrats a gift -- comments that indicate he thinks native-born congresswomen he detests should “go back” to the countries of their ancestors. On Monday, the four congresswomen handed Trump a gift in return, managing to respond to the president’s insults in some of the most ... Read More