Drawing on Milton Friedman’s dictum, and looking at current rates of money growth around six percent, FOMC members should have confidence that inflation will return to their two percent target even if real GDP continues to grow at four percent annually.
Did Milt have cause and effect backwards, or was he simply implying an association? As we can see, post crash, the blue line, the implicit price deflator, moves up above 2% while the M2 growth, red line, as barely gotten to 6%. Then with the M2 growth holding at 10%, the deflator begins dropping down to 1.6% while M2 growth is still above 6%! Then, further, M2 Growth stays above 6% while the deflator continues below 1.5%. Now we see M2 Growth dropping back below 6%, and we are supposed to expect the deflator to rise up to 2%?
By the way, check out 2006. Here we have the price deflator at 3%, and the economy starts to crash while M2 Growth is at 5%.
No Peter, in case you have not heard, prices are dropping. The producer price index posted a negative change, and is now 1.4% YoY, and I doubt the consumer index will get near to 2% since it has been dropping anyway. In fact, Peter, the deflator has been dropping almost consistently since the stimulus almost crashed the economy in 2011. Further more, it seems clearly that Milt got cause and effect backwards, he was yet another economist with priors to confirm.
Also, Peter, try telling us what exactly the Fed was supposed to do to get M2 growth back up? You seemed to neglect that important fact in your post. QE? Take a look, M2 dropping while the Fed was doing the QE all the way through 2013. Buy Treasuries? What will that do? They are already at .1% at the time. I don't see anything in this chart that agrees with Peter's post.
Peter Ireland needs to find better Milt quotes.
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