Umm, no Jonathan, I don\’t quite think so

Keynes is, as regulars here know, a man generally regarded as the \”dark knight\” of economics, a man who made intellectually respectable notions that had been often regarded as little more than the ploys of quacks and charlatans. Books by Henry Hazlitt and William Hutt, for example, have in my view pretty much demolished his central idea: that the way to get out of a recession is for governments to print money in large amounts and hopefully, when the sun comes out from behind the clouds, to turn on the monetary and fiscal brakes later on.

Err, no.

Sorry, but there\’s something of a confusion there between Keynesian ideas and what would be the standard monetarist ideas (St. Milt and all).

A monetarist would say that the way to get out of a recession was to go off and print more money, just as a monetarist would say that they way to reduce inflation or curtail a boom was to stop doing so.

This is, after all, what Milton Friedman and Anna Schwartz pointed out, that (OK, to make this less incendiary, what they identified as, rightly or wrongly) it was the falling money supply that made the Depression so bad.

Thus lower interest rates, QE, reductions in reserve ratios (if there are any of course) and so on are all monetary, and monetarist, responses.

Keynes then went on to say that when you\’d tried these things (for he was a monetary economist, after all) and you still needed to do something more, then you had to reach for the fiscal levers. Get the government to borrow and spend.

The current argument between those like Scott Sumner (on the monetaristish side) and Paul Krugman (on the Keynesian fiscal side, both being very broad caricatures) is really whether we have exhausted those possible monetarist responses. Sumner says no and that\’s what the problem is, we need to do more money stuff. Krugman says yes and that\’s what the problem is, we need to do more fiscal stuff.

Yes, agreed, this is very broad brush stuff here, but the idea that printing lots of money to get us out of a recession is a distinctively Keynesian idea is wrong: borrowing and spending lots of it is, but printing it just ain\’t.

4 thoughts on “Umm, no Jonathan, I don\’t quite think so”

  1. Just an idle thought – printing money is just like issuing trillions of undated bonds, isn’t it? So is there any difference betweeen borrowing through the bond market and through the currency market?

    Put another way is borrowing money (through bonds) and giving it to people in the form of cash Keynesian or Monetarist?

  2. Matthew,

    Money and bonds aren’t the same. Money is a medium-of-exchange, it is used to intermediate all other transactions, bonds aren’t.

  3. Sure Current, but bonds could be too, no? I think the point I’m making is printing money is really just a form of taxation.

Leave a Reply

Your email address will not be published. Required fields are marked *