QOTD: Reviving Japan or Reviving USA ?

Paul Kasriel points to Milton Friedman’s “Reviving Japan” as relevant to present U.S. monetary policy. What follows are a series of quotes from Friedman’s 1998 discussion. Kasriel argues that if it were good enough for Japan in 1998, then surely if Friedman were alive today, he would argue its appropriate for the US:

“The surest road to a healthy economic recovery is to increase the rate of monetary growth …”

“Defenders of the Bank of Japan will say, ‘How? The bank has already cut its discount rate to 0.5 percent. What more can it do to increase the quantity of money?”

“The answer is straightforward. The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan …”

“There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately.”

“… (I)t is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight (emphasis added) …; high interest rates, that money has been easy (emphasis added).”

“Japan’s recent experience of three years of near zero economic growth is an eerie, if less dramatic, replay of the great contraction in the United States. The Fed permitted the quantity of money to decline by one-third from 1929 to 1933, just as the Bank of Japan permitted monetary growth to be low or negative in recent years. … The United States revived when monetary growth resumed …”

“The Fed pointed to low interest rates as evidence that it was following an easy money policy and never mentioned the quantity of money. The governor of the Bank of Japan in a speech on June 27, 1997, referred to the ‘drastic monetary measures’ that the bank took in 1995 [a cut in the discount rate from 1.75 percent to 0.5 percent] as evidence of ‘the easy stance of monetary policy.’ He too did not mention the quantity of money.”

“After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy (emphasis added) of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.”

Who suspected that Milton Friedman was an advocate of quantitative easing, and Central Bank intervention for deeply depressed economies.

Its been said “There are no atheists in foxholes;” Apparently, the economic equivalent is “There are no true Free Marketers during depressions” either . . .


Reviving Japan
Milton Friedman
Stanford University Hoover Digest, April 30, 1998

Benjamin Strong and Milton Friedman – Ironically, Something in Common?
Paul Kasriel
Northern Trust, September 19, 2011

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