[rgcounts]

I’m discussing the Fed with someone online, and he presented two objections to my argument which I don’t really know how to answer.

1) His argument is that due to legal and political restraints (i.e. Germany), the EU has been unable to inflate to combat the recession. Setting aside the issue of inflation combating recession (though commentary is never bad on that and I would welcome it), is it true that the EU has been restrained from inflating substantially in any way? Why? What is the most accurate way to respond to that argument?

2) I made the argument that the only real austerity measures that the EU have taken is tax increases; no budget cuts. He countered that Greece cut its budget by 30% in 2013. I did a little research, but the claims that I came up with were too conflicting for me not to ask. Is it true that Greece cut its budget by 30%? If not, why are people claiming that? If so, how has that affected Greece’s economy?

As a bonus, I challenged my friend to explain the Austrian theory of the business cycle. He did. Fairly well, actually. He left me with this comment:

In the post-WWII period, the Fed has taken a much more Keynesian-style approach to monetary policy, expanding the money supply and cutting interest rates during recessions. Were ABCT true, this ought to be continually sowing the seeds for future disastrous bubbles, so we should be seeing deeper recessions in this post-war period than before. That is not the case.

a) Is it really true that methods of inflation in modernity is that much more Keynesian than before WWII?
b) The first thing that stands out to me is that the housing bubble a few years ago was just as bad/slightly less bad than the Great Depression. Is that true? Partly true? Is that a good argument to make?
c) Also, I feel obligated to prove that there have been many deep recessions, but I don’t know what really qualifies as a “deep recession.” Where can I find more info on perhaps a list of recessions in the 20th century? If you feel obligated, can you provide a list?

Thanks.

[jmherbener]

The chart of monetary aggregates from the ECB shows that M1 growth rates were above 10 percent from 2003-2006 and then fell as the ECB tightened which triggered the financial crisis in Europe. The growth rate of M1 then increase from near zero in 2008 to nearly 15 percent in 2009 and then slowed until 2011. Since then it has increased from around 2 percent to around 8 percent in 2013 before falling again to around 5 percent currently.

http://sdw.ecb.europa.eu/reports.do?node=1000003501

The claim that this degree of monetary inflation was insufficient to revive the European economy should be given no more weight than Krugman’s similar claim about Fed inflation in the USA. Moreover, I don’t know exactly what your antagonist is referring to by “legal restraints” on the ECB, but in practice there are no actual “legal” restraints on government agencies since the government itself writes the law. If he’s just referring to the mandate to keep price inflation near the target of 2 percent, then he is mistaken. This is no more a constraint on the ECB than the same mandate is a constraint on the Fed.

In any case, neither did nearing the 2 percent target correlate with tightening of monetary policy nor lower than 2 percent correlate with expansionary monetary policy. As the growth rate of M1 slowed from 2006 to 2008, price inflation rose from 2 percent to 4 percent. Then as the growth rate of M1 rose from 2008 to 2009, price inflation fell from 4 percent to near zero. Then as the growth rate of M1 fell from 2009 to 2011, price inflation rose from near zero to 2.5 percent. Even though price inflation was already above its target of 2 percent in 2011, the ECB increased the growth rate of M1 from around 1 percent to 8 percent in the middle of 2013. Currently the rate of price inflation in the Euro is near zero percent. So, the ECB target is no barrier to further monetary inflation.

Here are statistics on Greece’s fiscal budget:

http://research.stlouisfed.org/fred2/series/GRCGFCEQDSMEI

Take a look at the article by Selgin, Lapstrates, and White on the performance of the Fed:

http://www.cato.org/sites/cato.org/files/pubs/pdf/WorkingPaper-2.pdf

The alleged improved performance of the Fed after WWII doesn’t include the recent housing boom and financial collapse. The excellent performance of the economy in the late 1940s and 1950s was caused more by the reconfiguration of capital investment and employment in the face of the giant rollback of the government from its wartime levels than to Fed policy. The great moderation from the mid-1980s to the mid-1990s was not caused by Fed policy at all, but instead was the result of the re-establishment of the dollar as a world reserve currency. Finally, the performance of the Fed is measured by reduced volatility of GDP. But chronic monetary inflation and credit expansion can lead to stagnation of GDP instead of volatility. This is what we’re experiencing currently with the Fed’s massive inflation of the monetary base during the downturn, which (contrary to your antagonist’s claim about what ABCT implies) is not starting another boom but adding to the uncertainty of the economic climate for investments in the future resulting in a dearth of investment today.

[rgcounts]

The alleged improved performance of the Fed after WWII doesn’t include the recent housing boom and financial collapse.

Whoa. I thought that the housing bubble was caused by Bernanke lowering the interest rates. Isn’t that what the Austrians have been saying for so long? Why doesn’t the performance of the Fed after WWII include the recent bubble?

So then, what of the argument that the Federal Reserve causes instability and longer crises? This data doesn’t seem to coincide with the Austrian theory that the Fed leads to longer lasting busts.

Or am I just way off the mark?

[jmherbener]

What I meant was that those who claim that the Fed has reduced volatility since WWII appeal to studies that do not include the recent financial collapse. The study I linked to says the same thing: the performance of the Fed has been better since WWII than before WWII. Well, maybe, if you don’t include the Fed causing the recent boom-bust. The studies don’t include the recent boom-bust because they were published before the business cycle has run its course. Take a look at the study by Selgin, Lapstrates, and White at the link above.

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