The available evidence…casts grave doubt on the possibility of producing any fine adjustments in economic activity by fine adjustments in monetary policy....and much danger that such a policy may make matters worse rather than better…The basic difficulties and limitations of monetary policy apply with equal force to fiscal policy.HT: John Taylor
Political pressures to ‘do something’ …are clearly very strong indeed in the existing state of public attitudes.
The main moral to be had from these two preceding points is that yielding to these pressures may frequently do more harm than good. There is a saying that the best is often the enemy of the good, which seems highly relevant. The attempt to do more than we can will itself be a disturbance that may increase rather than reduce instability.
Tuesday, March 16, 2010
Milton Friedman on the fallibility of monetary and fiscal policy
Just a reminder that neither fiscal nor monetary policy is well-suited to fine-tune the economy. Efforts to do so generally cause more harm than good. I can vouch for the wisdom of these words, having observed the interaction of politics and economics for the past 35 years. Milton said this in 1958, and it is still true today, if not more so:
Friedman was exactly correct.
ReplyDeleteWent to the John B. Taylor link and read article. John B. Taylor’s book Getting Off Track is a great 100 page read. Better yet, you have to go all the way to page 3 to see Taylor spell out what happened in the cheap money bubble. The rest of the book merely cements the account of the cheap money bubble explained very early in the book.
Taylor should be the Federal Reserve chairman. He may be chairman one of these days. That would be a good day.
John B. Taylor, Thomas Sowell, and Walter E. Williams …put them together….. and you have Milton Friedman.
Scott, from today's Daily Pfennig, please see extract below. Am curious to get your take on it. Thanks.
ReplyDelete"As I pointed out yesterday, this is a very busy week for data here in the US, and yesterday started us off with a bang. The volatile Empire manufacturing number showed a slight tick up but pretty much came in where it was expected. The more important Industrial Production and Capacity Utilization numbers followed, and both confirmed the US economy is continuing to recover; albeit at a slow pace. Industrial production increased .1% in February, and Capacity Utilization also increased to 72.7%. This data got the day started off right for dollar bulls, and the greenback shot up.
But in the middle of all of this economic data was a piece of information which sent a shiver through the bond markets. Global demand for US financial assets weakened in January as both China and Japan, the two biggest holders of Treasuries, reduced their positions. The Net Long-term TIC Flows were expected to come in at $47.5 billion for the month, but instead just $19.1 billion of US financial assets were purchased. Including short-term securities, total investment flows show foreigners sold a net $33.4 billion in January after a net buying of $53.6 billion the previous month.
As readers of the Pfennig know, this is not good news for the US. We remain dependent on foreign investors, as there is just not enough 'internal' demand for our debt. If China and Japan continue to push away from the US debt table, interest rates in the US will rise, as we have to make the debt more attractive to pursue other buyers. China has been a net seller of US Treasuries for three straight months now, and Japan doesn't seem to have the ability to pick up the slack. We have been warning of this for some time now, and it looks like we may be finally seeing a reduction in demand for US investments."
I have long held the belief that interest rates on Treasury debt are determined by macro forces (primarily growth and inflation expectations), and not by any class or group of investors. If there is a reason to sell Treasuries that is obvious to the Chinese, it should be obvious to everyone.
ReplyDeleteI would further note that during the month of January, when foreigners were reportedly exiting the Treasury market, Treasury yields fell about 30 bps on average across the curve. In other words, I don't see that foreign selling had any impact whatsoever on the market.
Thanks Scott, as ever a v. interesting perspective.
ReplyDeleteBTW, I'm having quite a time of it trying to play Cable (long $ and short £), currently in profit but as i said before doing it more from a hedging POV.
Currencies are really just the world's most widely traded share prices, aren't they? With just the same degree of sentiment affecting the price.