Neutral Money

The Debate Stopper

I recently debated with an Austrian friend about the causes of macroeconomic cycles. He argued that all macroeconomic distortions result from our unwillingness to let prices (including wages) adjust freely. According to this view, the Great Depression occurred simply because deflation was not allowed to work its way through the system.

Of course, I completely disagree with his position, but that’s not why I’m writing this blog. I’m writing because what stood out most from our conversation was the conversation itself — how almost ninety years after the fact we’re still fiercely debating what happened or didn’t happen or should’ve happened in the 1930s.


Money Unbound

Last night I realised that focussing this blog solely on secular stagnation was a mistake. Reading through a discussion by pre-eminent economists on whether secular stagnation is the cause of the slow recovery, or of Greek’s problems, it suddenly hit me: it doesn’t really matter.

That’s right: it doesn’t matter what causes deficient demand. What matters is that demand can be deficient.

The problem is that the secular stagnation debate introduces a false premise: that without secular stagnation our monetary system is civilised.

One-Month Money — Frequently Asked Questions

What is One-Month Money about?

One-Month Money (buy from Amazon UK, Amazon US, Harriman House) is divided into two parts. Part One — ‘The Case for Change’ — explains why our current economy is inherently unstable, and why our tools of fiscal and monetary policy can only ever hope to moderate, but never eliminate, this instability. This section ends with an explication of secular stagnation in developed economies. Driven by a structural decline in workforce growth, secular stagnation will make our current remedies, already inadequate, even more so.

To Stimulate or not to Stimulate

Keynesians like Paul Krugman and Simon Wren-Lewis have been working overtime in defence of their beliefs. The anti-Keynesian attack began before Christmas, when U.K. Chancellor of the Exchequer George Osborne wrote in the WSJ that Keynesians wanting more spending and more borrowing “were wrong in the recovery, and they are wrong now.” The attack continued when John Cochrane penned a WSJ opinion piece denouncing the efficacy of government stimulus. In it, he pointed to the fact that the US has grown despite austerity as proof that deficits are not only useless but harmful.

Is the decline in the US participation rate a result of secular stagnation?

One question I struggled with in my book was how secular stagnation would manifest itself. Would the unemployment rate stay perniciously high? Or would the symptoms be subtler: a low unemployment rate, for instance, combined with a low participation rate?

The Twitter discussion surrounding the latest US jobs report has reignited my internal debate. So I thought I’d share it. For me the key question is this: what if the declining participation rates, shown in the chart below, are actually a result of secular stagnation? What if the US economy has become incapable of employing as many willing workers as it once could?

The Case for the Helicopter Drop

In my book, I explore the efficacy of our various forms of “stimulus,” which are usually broken down into monetary stimulus (lower interest rates and QE) and fiscal stimulus (deficit spending, tax cuts, and redistribution.) Another type of stimulus, which blurs the line between monetary and fiscal, is for the central bank to inject newly-created money directly into people’s bank accounts. Instead of swapping money for government debt, as with QE, the central bank would hand out money for free. This is a new, untested, and highly experimental form of economic stimulus, and because it wasn’t receiving mainstream coverage at the time I was writing my book, I didn’t explore it in great depth. So I thought I’d share a few thoughts now.

The Productivity Trap

In my last post, I began by discussing the two definitions of secular stagnation — how one relates to the demand-side while the other to the supply-side. As a proponent of a neutral monetary system, I said that I only cared about the demand-side definition, since the main impetus behind neutral money is to solve the problem of deficient spending.

The truth is that the two definitions are inextricably linked.

Nobody Knows

“Nobody really knows.” This is a phrase we should use more often, yet it’s guaranteed to send producers at CNBC running for the hills. If you want coverage, whether in the Financial Times or Bloomberg, you better pick a side. “Austerity will unleash a boom.” “Austerity will cause a depression.” Pick one of the above, but whatever you do, don’t sit on the fence.

Well, I happen to like fences. Despite the claims of Keynesian economists like Paul Krugman, the truth is that nobody really knew, in 2010, how austerity would affect Greece.